Edited version of private advice

Authorisation Number: 5010076142246

Date of advice: 4 August 2021

Ruling

Subject: CGT disposal

Question

Will the disposal of the taxpayer's interest in the medical practice under the contract of sale result in the disposal of a CGT asset, and therefore CGT event A1 has occurred under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, having considered your circumstances and the relevant factors, the Commissioner agrees that this sale represents the sale of a CGT asset.

This ruling applies for the following period:

year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

XYZ Pty Ltd (the taxpayer) and another entity jointly owned the business (including goodwill) of a medical clinic, which trades as a medical practice. The taxpayer acquired its interest in this medical practice after 1985.

A contract of sale was executed by the taxpayer for disposal of the business and the sale settled one month later. The sale price comprised of amounts for goodwill and plant and equipment.

The doctors working at the clinic at the time of sale were required under the contract of sale to work in the business for a period of X months, after which either party could terminate the work arrangement with two months' notice. There was no further payment if a longer period of service was worked, nor any refund or repayment of the purchase price if only three months of service was provided.

Under the contract of sale, the doctors working in the clinic after the sale were to receive a specified percentage of fees billed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 108-5(2)(b)

Reasons for decision

Summary

The sale of a business, including goodwill, is a disposal of a capital gains tax (CGT) asset. The disposal of the interest in the medical practice is a disposal of a CGT asset, which has triggered CGT event A1 occurring under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Section 104-10 of the ITAA 1997 states that CGT event A1 will happen if you dispose of a CGT asset. Subsection 104-10(3) of the ITAA97 states that if the asset is disposed of under a contract, CGT event A1 happens when the contract is entered into. Subsection 108-5(2)(b) of the ITAA97 states that goodwill, or an interest in it, is a CGT asset.

Taxation Ruling 1999/16 provides the Commissioner's views on the treatment of goodwill as a CGT asset, including where a taxpayer makes a capital gain or loss if a CGT event happens to goodwill of a business. Paragraph 16 provides that goodwill of a business is a single CGT asset, and not separate from "personal goodwill" or "name goodwill."

The Commissioner's views on lump sum payments of income, with regard to healthcare practitioners, is provided in the ATO's online publication, "Lump sum payments received by healthcare practitioners." This publication advises that lump sum payments from healthcare operators to practitioners will typically be payments of revenue where the practitioner starts work, or continues to work, for the operator, amongst other conditions.

You entered into a contract of sale of business in month/20XX, and settlement occurred shortly after. The sale price included amounts reflecting business goodwill, and plant and equipment. Although your contract of sale includes clauses relating to the practitioners continuing to work, this was only for a transitional period to assist with the transition and handover. It is not considered that the arrangement described in the contract of sale with your application would constitute the type of arrangement being discussed in the online publication.

Therefore, your disposal of your interest in the goodwill of the business resulted in CGT event A1 occurring.