Edited version of private advice

Authorisation Number: 7925142857857

Date of advice: 15 June 2021

Ruling

Subject: Capital gains tax

Question 1

Is the goodwill of the business considered a pre-CGT asset for the purposes of Subdivision 149 of the Income Tax Assessment Act 1997?

Answer 1

Yes.

Where a trustee of a discretionary trust continues to administer a trust for the benefit of members of the same family, the Commissioner will find it reasonable to assume that majority underlying interests in the trust assets have not changed (Taxation Ruling IT 2340 Income tax: capital gains : deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date (IT 2430).

Question 2

If the answer to question one is yes, if the Trust transfers the goodwill to a wholly owned company under subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997), can the shares in the wholly owned company be pre-CGT assets?

Answer 2

Yes

Detailed reasoning

Law Companion Ruling LCR 2016/3 Small business restructure rollover: genuine restructure of an ongoing business and related matters (LCR 2016/3)states that where the restructure is a genuine restructure of an ongoing business small business rollover relief may apply, where, among other things, there is no change in the ultimate economic ownership of any of the significant assets of the business for three years following the roll-over.

The rollover under Subdivision 328-G of the ITAA 1997 is designed to facilitate flexibility for owners of small business entities to restructure their business, and the way their business assets are held, while disregarding the tax gains and losses that would otherwise arise.

To be eligible for the rollover several conditions under section 328-430 of the ITAA 1997 must be satisfied.

Genuine restructure - 328-430(1)(a) of the ITAA 1997

Paragraph 328-430(1)(a) of the ITAA 1997 requires that the transaction is, or is part of, a genuine restructure of an ongoing business.

Whether a transaction is, or is part of, a 'genuine restructure of an ongoing business' is a question of fact that is determined having regard to all of the circumstances surrounding the restructure.

LCR 2016/3 states that a genuine restructure of an ongoing business is one that could be reasonably expected to deliver benefits to small business owners in respect of their efficient conduct of the business.

Paragraph 7 of LCR 2016/3 outlines the following features that indicate a transaction is, or is part of, a genuine restructure of an ongoing business:

•                    it is a bona fide commercial arrangement undertaken to facilitate growth, innovation and diversification, to adapt to changed conditions, or to reduce administrative burdens and compliance costs

•                    it is authentically restructuring the way the business is conducted, as opposed to a divestment or a preliminary step to facilitate the economic realisation of assets

•                    the economic ownership of the business and its restructured assets is maintained

•                    the small business owners continue to operate the business through a different legal structure, and

•                    it results in a structure likely to have been adopted had the small business owners obtained appropriate professional advice when setting up the business.

However, the restructure of an ongoing business by a business owner is not genuine if it is done in the course of winding down to transfer wealth between generations or realising their ownership interests. A restructure is likely to not be a genuine restructure of an ongoing business if:

•                    it is a preliminary step to facilitate the economic realisation of assets, or takes place in the course of winding down to transfer wealth between generations

•                    it effects an extraction of wealth from the assets of the business for personal investment or consumption

•                    it creates artificial losses or brings forward their recognition

•                    it effects a permanent non-recognition of gain or creates artificial timing advantages, and/or

•                    there are other tax outcomes that do not reflect economic reality.

Small business entities, affiliates or connected entities - 328-430(1)(b) of the ITAA 1997

Subparagraph 328-430(1)(b)(iii) of the ITAA 1997 requires each party to the transfer to be connected with a small business entity for that income year.

Ultimate economic ownership - 328-430(1)(c) of the ITAA 1997

Paragraph 328-430(1)(c) of the ITAA 1997 requires that the transaction does not materially change the ultimate economic ownership of the asset.

The ultimate economic ownership does not change as a result of the transfer.

Section 328-440 of the ITAA 1997 is satisfied, and consequently paragraph 328-430(1)(c) of the ITAA 1997 is also satisfied.

Active asset - 328-430(1)(d) of the ITAA 1997

As subparagraph 328-430(1)(b)(iii) of the ITAA 1997 applies, subparagraph 328-430(1)(d)(ii) of the ITAA 1997 requires that the asset be an active asset that satisfies subsection 152-10(1A) of the ITAA 1997 in that income year.

Subsection 152-10(1A) of the ITAA 1997 is satisfied and consequently subparagraph 328-430(1)(d)(ii) of the ITAA 1997 is also satisfied.

Residency requirements - 328-430(1)(e) of the ITAA 1997

Paragraph 328-430(1)(e) of the ITAA 1997 requires each party to the transfer to meet the residency requirements under section 328-445 of the ITAA 1997.

The both the company and trust are residents for CGT purposes, satisfying section 328-445 of the ITAA 1997 and subsequently paragraph 328-430(1)(e) of the ITAA 1997.

Applying the rollover - 328-430(1)(f) of the ITAA 1997

Paragraph 328-430(1)(f) of the ITAA 1997 requires each party to the transfer to apply the rollover in relation to the asset.

This ruling applies for the following period periods:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Trustee has carried on the Business since it was acquired by the Trust on DD Month 19XX (Acquisition Date).

Since the acquisition date, the Business has been operated in pursuit of the same strategy, from the same locality and the same asset class as a transport and logistics provider.

The Business has a number of key clients that were clients of the Business as at the Acquisition Date or soon after, and continues to service the same general nature/category of clients, and a number of the same clients following the Acquisition Date.

In 20XX, the Trust acquired a Competitor Business that was materially similar to the Business. The Business integrated the Competitor Business and its assets and treated this as an extension of the Business.

The Business has maintained a majority underlying interest of more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset, and more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset.

The Trust is considering a restructure under Subdivision 122-A of the ITAA 1997, whereby the Trust will transfer the Goodwill of the Business to a wholly owned company.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 100-25

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 109-5

Income Tax Assessment Act 1997 section 328-460

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1936 section 160ZZS