1 Are all the requirements in paragraphs 716-440(1)(a) to (g) inclusive of the Income Tax Assessment Act 1997 (ITAA 1997) met when Offshore LP transferred its 100% shareholding interest in HoldCo XYZ Pty Ltd (Holdco) to the HeadCo XYZ Pty Ltd tax consolidated group (HeadCo TCG) on YY/YY/20XX?
No. Question 2 Will CGT event A1 happen in relation to the goodwill of SubCo XYZ Pty Ltd (SubCo) pursuant to subsection 104-10(1) of the ITAA 1997 upon a disposal of the 'Relevant Intangible Assets'? Answer No, CGT event A1 will not happen in relation to the goodwill of SubCo upon disposal of the 'Relevant Intangible Assets', subject to the application of Subdivision 815-B of the ITAA 1997. Question 3 If the answer to Question 2 is "No", will CGT event C1 happen in relation to the goodwill of SubCo pursuant to subsection 104-20(1) of the ITAA 1997 upon a disposal of the 'Relevant Intangible Assets'? Answer No, CGT event C1 will not happen in relation to the goodwill of SubCo upon disposal of the 'Relevant Intangible Assets', subject to the application of Subdivision 815-B of the ITAA 1997. Question 4 If the answers to Questions 2 and 3 are "No", will CGT event C2 happen in relation to the goodwill of SubCo pursuant to subsection 104-25(1) of the ITAA 1997 upon a disposal of the 'Relevant Intangible Assets'? Answer
No, CGT event C2 will not happen in relation to the goodwill of SubCo upon disposal of the 'Relevant Intangible Assets', subject to the application of Subdivision 815-B of the ITAA 1997. This ruling applies for the following period : Year ended 30 June 20YY The scheme commences on: 1 July 20XX
The Operating Group The Operating Group is an offshore headquartered portfolio of brands. Prior to the restructure below, the Operating Group consisted of Offshore LP and its subsidiaries. One subsidiary included HeadCo XYZ Pty Ltd (HeadCo) which is the head of a tax consolidated group (HeadCo TCG). SubCo acquisition by the Operating Group SubCo's business originated in Australia and reaches customers through online sales and through stores. SubCo was approached by the Operating Group to acquire a majority interest in SubCo. This partial acquisition by the Operating Group of SubCo was undertaken at arm's length between two independent third parties. The Operating Group acquired SubCo through HoldCo and Acquire XYZ LP. Offshore LP held its share of Acquire XYZ LP through an Australian incorporated entity, HoldCo, which was incorporated on XX/XX/20XX. Offshore LP held a 100% participation interest in HoldCo since HoldCo was incorporated on XX/XX/20XX.
In early 20XX, Acquire XYZ LP entered into a Share Sale Agreement to acquire a 100% interest in the shares in SubCo. The consideration for the sale included a cash amount and an interest in Acquire XYZ LP(to be held by the existing SubCo owners ('Rollover Shareholders')) Restructure Following the acquisition, in late 20XX and well within 12 months of the incorporation of HoldCo on XX/XX/20XX, the Operating Group undertook a restructure of its businesses. The restructure was to rationalise and simplify the existing structure. Ordered steps were undertaken including: a) HoldCo elected to form an income tax consolidated group with all wholly-owned Australian subsidiaries for Australian tax purposes b) The minority interest in Acquire XYZ LP held by the Rollover Shareholders was transferred to Offshore LP (through its interposed subsidiaries) in exchange for shares in the Operating Group. This meant that SubCo was now indirectly wholly owned by the Operating Group via Offshore LP, HoldCo and Acquire XYZ LP. c) Acquire XYZ LP became a resident of Australia
d) Offshore LP contributed HoldCo to HeadCo in exchange for a note at market value. On the same day, Offshore LP capitalised the loan note to HeadCo by way of issuances of new shares in HeadCo. Offshore LP ceased to hold membership interests in HoldCo on YY/YY/20XX. This resulted in HoldCo (and its wholly-owned Australian subsidiaries) becoming a subsidiary member of the HeadCo TCG on YY/YY/20XX. The Intangibles Transaction SubCo conducts business which has goodwill. The sources of goodwill of the business include, among other things, rights to use certain intangible assets that were owned by Subco (the 'Relevant Intangible Assets'). The intangible assets include trademarks, brand names, and domain names. SubCo entered into agreements with the Operating Group. Under certain agreements, SubCo agreed to transfer the 'Relevant Intangible Assets' that it owns to the Operating Group for market value (the Intangibles Transaction).
Related agreements were entered into between members of the Operating Group and SubCo to ensure that SubCo could continue to carry on all of its existing functions and activities after the transfer of the 'Relevant Intangible Assets', and that SubCo will continue to have the necessary rights to use them to carry on its business. Other than the transfer of the 'Relevant Intangible Assets', there are no other material assets being transferred or disposed of by SubCo. No contracts or any other form of agreement has been entered into for the disposal of the business carried on by SubCo to the Operating Group. Furthermore, it is the intention of the parties that nothing under the proposed arrangement is intended to be, or have the effect of being, a transfer of a business from SubCo to any other party. Assumption Any capital gain or capital loss made by Offshore LP on disposal of HoldCo shares would be disregarded because of the operation of Division 855 of the ITAA 1997.
Income Tax Assessment Act 1997 Section 104-10 Income Tax Assessment Act 1997 Section 104-20 Income Tax Assessment Act 1997 Section 104-25 Income Tax Assessment Act 1997 Section 705-185 Income Tax Assessment Act 1997 Section 716-440
Question 1 Are all the requirements in paragraphs 716-440(1)(a) to (g) inclusive of the ITAA 1997 met when Offshore LP transferred its 100% shareholding interest in HoldCo to the HeadCo TCG on YY/YY/20XX? Summary As there has been a change in the majority economic ownership of HoldCo in the 12 month period before the joining time, the requirement in paragraph 716-440(1)(f) is not met. Therefore subsection 716-440(3) (the churn provision) does not apply in respect of HoldCo when it joined the HeadCo TCG on YY/YY/20XX. The assets of HoldCo will therefore have their tax cost setting amounts reset under the tax consolidation rules. Detailed reasoning Subsection 716-440(3) of the ITAA 1997 has the effect that sections 701-10, subsection 701-35(4) and subsection 701-35(5) ITAA 1997 (i.e. the tax cost setting rules) do not apply to a joining entity's assets in respect of a joining entity becoming a subsidiary member of an income tax consolidated group where the requirements of subsection 716-440(1) are satisfied. 716-440 Membership interests in joining entity not subject to CGT under Division 855 - foreign entity ceasing to hold interests. (1) Subsection (3) applies if:
(a) an entity (the joining entity ) becomes a *subsidiary member of a *consolidated group at a time (the joining time ); and (b) another entity (the disposing entity ) ceased to hold *membership interests in the joining entity during the period that: (i) started 12 months before the joining time; and (ii) ended immediately after the joining time; and (c) a *CGT event happened because the disposing entity ceased to hold the membership interests; and (d) either: (i) a *capital gain or *capital loss of the disposing entity from the CGT event was disregarded because of the operation of Division 855; or (ii) if there had been a capital gain or capital loss of the disposing entity from the CGT event, the capital gain or capital loss would have been disregarded because of the operation of Division 855; and (e) section 701-10 (cost to head company of assets of joining entity) applies to the joining entity's assets in respect of the joining entity becoming a subsidiary member of the group (disregarding subsection (3) of this section); and
(f) it is reasonable to conclude that, throughout the period mentioned in paragraph (b), the sum of the *total participation interests held by an entity (the control entity) and its *associates in the joining entity was 50% or more; and (g) in a case where the control entity is not the disposing entity - it is reasonable to conclude that the sum of the total participation interests held by the control entity and its associates in the disposing entity was 50% or more at the time the CGT event happened. ... (3) The following provisions do not apply to the joining entity's assets in respect of the joining entity becoming a *subsidiary member of the group: (a) section 701-10 (cost to head company of assets of joining entity); (b) subsection 701-35(4) (setting value of trading stock at tax-neutral amount); (c) subsection 701-45(5) (setting value of registered emissions unit at tax-neutral amount). For the churn provision in subsection 716-440(3) to apply all of the requirements in paragraphs 716-440(1)(a) to (f) (in respect of the joining entity) and that in paragraph (g) (in respect of the disposing entity) where relevant, must be met. In this case:
• Paragraph 716-440(1)(a) is satisfied as HoldCo (and its wholly-owned subsidiaries) became a subsidiary member of a consolidated group (the HeadCoTCG) at a time (YY/YY/20XX). • Paragraph 716-440(1)(b) is satisfied as Offshore LP ceased to hold membership interests in HoldCo on YY/YY/20XX (at the joining time). The test period is a period of 12 months ending just after the joining time of YY/YY/20XX. • Paragraphs 716-440(1)(c) and (d) are satisfied as CGT event A1 happened as a result of Offshore LP ceasing to hold membership interests in HoldCo and it is assumed the resulting capital gain was disregarded under Division 855 of the ITAA 1997. • Paragraph 716-440(1)(e) is satisfied as, if the churning measure does not apply, the tax cost of HoldCo assets will be reset under the consolidation entry tax cost setting rules. With regard to paragraph 716-440(1)(f), the entity (control entity) to whom the conditions of the paragraph are to be applied must first be identified (noting paragraph 716-440(1)(g) will then only apply if this (identified) control entity is not the (foreign) disposing entity).
Paragraph 716-440(1)(f) is intended to ensure that the churning measure does not apply (when it otherwise would) where it is reasonable to conclude that 50% or more of the total participation interests in the joining entity have not been held by an entity (the control entity) and its associates throughout the period starting 12 months before the joining time and ending immediately after the joining time. Law Companion Ruling LCR 2019/2: Consolidation: Churning of joining entities (the LCR) provides guidance on the churning measure with Example 4 and paragraphs 32 to 41 of the LCR dealing specifically with the operation of paragraph 716-440(1)(f) in respect of the Relief for post-acquisition restructures within 12 months issue. According to the LCR at paragraph 39, The control entity can be any entity that owns direct or indirect participation interests in the joining entity (by which presumably is meant owns at some time during (throughout) the 12 month test period). According to the LCR, Offshore LP can be regarded as a control entity for the purposes of paragraph 716-440(1)(f) (although the requirements of the paragraph are not satisfied in respect of the control entity).
HoldCo was incorporated on XX/XX/20XX. Throughout the 12-month test period, including immediately after joining time, Offshore LP is the control entity as, together with its associates, it held total participation interests of 50% or more in HoldCo. (Offshore LP held a 100% participation interest in HoldCo since it was incorporated on XX/XX/20XX). Paragraph 716-440(1)(f) is not satisfied when applied to Offshore LP (as control entity) as it (and its associates) only acquired a 100% participation interest in HoldCo on XX/XX/20XX and therefore did not hold total participation interests of 50% or more in HoldCo throughout the 12 month test period ending immediately after the joining time on YY/YY/20XX. As the requirements in paragraph 716-440(1)(f) are not met (in respect of the joining entity Holdco and its wholly-owned subsidiaries), subsection 716-440(3) (the churn provision) does not apply in respect of HoldCo when it joined the HeadCo TCG on YY/YY/20XX. Question 2 Will CGT event A1 happen in relation to the goodwill of SubCo pursuant to subsection 104-10(1) of the ITAA 1997 upon a disposal of the 'Relevant Intangible Assets'? Detailed reasoning
CGT event A1 happens if a taxpayer disposes of a CGT asset: subsection 104-10(1). The disposal of a CGT asset takes place if a change of ownership occurs from one entity to another entity, whether because of some act or event or by operation of law: subsection 104-10(2). Taxation Ruling TR 1999/16 Income tax: capital gains tax: goodwill of a business (TR 1999/16) sets out the ATO's views on goodwill of a business and the application of the capital gains tax (CGT) provisions to goodwill. At paragraphs 9 - 10, the Ruling sets out what is 'goodwill' for CGT purposes: 9. 'Goodwill' for the purposes of the definition of 'CGT asset' in section 108-5 has the meaning it bears under the general law. It is the legal definition of goodwill as explained by the High Court in the Murry case, rather than its accounting and business definitions, which applies. 10. The legal meaning of 'goodwill', according to the majority justices of the High Court in the Murry case, has three different aspects namely property, sources and value. Furthermore, at paragraphs 12 -14 of the Ruling:
12. As explained more fully at paragraph 85 of this Ruling, goodwill is the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it. The attraction of custom is central to the legal concept of goodwill. Goodwill is a quality or attribute that derives among other things from using or applying other assets of a business. It may be site, personality, service, price or habit that obtains custom. It is more accurate to refer to goodwill as having sources than it is to refer to it as being composed of elements. Goodwill is a composite thing. It is one whole. It is an indivisible item of property that is legally distinct from the sources from which it emanates. It is something that attaches to a business and is inseparable from the conduct of a business. It cannot be dealt with separately from the business with which it is associated. [Emphasis added]
13. What goodwill means depends on the character and nature of the business to which it is attached. Goodwill differs in its composition in different trades or industries and in different businesses in the same trade or industry. One or more sources of goodwill may preponderate in one business and another source or sources may be prominent in another business. 14. Goodwill is not a series of CGT assets that inhere in other identifiable assets of a business. Goodwill, being a composite thing, attaches to the whole business. It does not attach separately to each identifiable asset of the business. Nor is there an element of goodwill in each identifiable asset of a business. [Emphasis added] The High Court in FC v T v Murry [1998] HCA 42; 98 ATC 4585; (1998) 39 ATR 129 ( Murry ) stated at paragraph 4: Goodwill is inseparable from the conduct of a business. It may derive from identifiable assets of a business, but it is an indivisible item of property, and it is an asset that is legally distinct from the sources - including other assets of the business - that have created the goodwill. Because that is so, goodwill does not inhere in the identifiable assets of a business, and the
sale of an asset which is a source of goodwill, separate from the business itself, does not involve any disposition of the goodwill of the business (emphasis added). The High Court also stated (at paragraphs 30-32): Care must be taken to distinguish the sources of the goodwill of a business from the goodwill itself. Goodwill is an item of property and an asset in its own right. For legal and accounting purposes, it must be separated from those assets and revenue expenditures of a business that can be individually identified and quantified in the accounts of a business. Goodwill, as property, is "inherently inseverable from the business to which it relates". That which can be assigned and transferred from the business may, while it is connected to the business, be a source of the goodwill of the business but cannot logically constitute any part of the goodwill of the business... It follows that the sale of an asset of a business does not involve any sale of goodwill unless the sale of the asset is accompanied by or carries with it the right to conduct the business... [emphasis added]
When an asset of the business is sold and the business is not, the sale may reduce the value of the goodwill of the business. Nevertheless, the sale does not involve the disposition of the goodwill of the business or any part of it. The legal meaning of 'goodwill' as explained in Murry is confirmed and clarified by the High Court in Commissioner of State Revenue v Placer Dome Inc [2018] HCA 59; 2018 ATC 20-677. At paragraph 91, the High Court stated: Goodwill for legal purposes does not extend to every positive advantage, and whatever adds value, including privileges or advantages that differentiate an established business from a business just starting out. Goodwill for legal purposes does extend to those sources which generate or add value (or earnings) to the business by attracting custom, whether that be from the use of identifiable assets, locations, people, efficiencies, systems, processes, or techniques of the business, or from some other identifiable source. And those sources of goodwill for legal purposes have a unified purpose and result - to generate or add value (or earnings) to the business by attracting custom.
TR 1999/16 explains the relationship between goodwill of a business and the get-up of the business. At paragraphs 99-100: What is the relationship between goodwill of a business and the get-up of the business or knowledge or information used in the business? 99. The get-up of a business - such as its business or trade name, its logos, slogans, symbols, signs, colour schemes and visual images - is a source of goodwill and is not in itself goodwill. Goodwill is legally distinct from the sources which create it: Murry (paragraph [4], 98 ATC at 4587; 39 ATR at 132). Goodwill derives from the use of the get-up of a business and from using or applying other assets of the business. 100. Although the Full Federal Court in FC of T v. Just Jeans Pty Ltd 87 ATC 4373; (1987) 18 ATR 775 referred to a name of a business, a trade mark, slogans or visual images as aspects of goodwill (87 ATC at 4382; 18 ATR at 786) or as manifestations or parts of goodwill of a business (87 ATC at 4383; 18 ATR at 786), the High Court in the Murry
case stated that 'it makes no sense to describe goodwill... as composed of trade marks, land or price, as the case may be' (98 ATC at 4591; 39 ATR at 137-138). The High Court went on to state that 'it is more accurate to refer to goodwill as having sources than it is to refer to it as being composed of elements ' (emphasis added - 98 ATC at 4591; 39 ATR at 138). Applying the principles in Murry and TR 1999/16, the disposal of the 'Relevant Intangible Assets'without a disposal of the business of SubCo does not involve a disposal of goodwill of SubCo. Whether there has been a disposal of one of several businesses, or part of a business which itself could constitute a business While there has not been a disposal of the business of SubCo under the Intangibles Transaction, it is necessary to consider whether the Intangibles Transaction in the circumstances constitutes a disposal of part of the business of SubCo and therefore results in disposal of goodwill. TR 1999/16 provides at paragraphs 72-76: 72. If a business owner is carrying on a business at one or at several locations or countries and part of the business is sold questions arise whether:
(a) several businesses are carried on; or (b) one business is carried on; and whether what is sold is: (c) an entire, self-contained business that a purchaser could conduct; or (d) something less than a discrete business. 73. If a business owner is carrying on more than one business, each business has its own separate goodwill and each business may be disposed of along with the goodwill attaching to it...
74. If a business owner is carrying on one business and disposes of some part of the business, it is a question of fact whether the owner has disposed of a discrete business that a purchaser could conduct or has merely disposed of a business asset or a collection of business assets. This question is determined having regard to all of the circumstances (and not solely from the purchaser's perspective) including whether sufficient relevant assets are sold to enable the purchaser to carry on the business the vendor had carried on, whether the assets sold are accompanied or carry with them the legal right, privilege or entitlement to conduct the business and whether what is sold is sold as a self contained business. If a business owner disposes of part of their business, an important consideration is whether the effect of the transaction is to put the purchaser in possession of a going concern the activities of which the purchaser could carry on without interruption: see Full Supreme Court of Tasmania decision in Zeekap (No 56) Pty Ltd v C of SD (Tas) 99 ATC 4745 at 4747-8; (1999) 42 ATR 295 at 297-8.
75. Many factors are relevant to this question though few are conclusive in themselves. If a purchaser assumes the conduct of a vendor's business and continues to carry it on, this points to a business having been transferred rather than a transfer of a business asset or a collection of business assets. The converse is not, however, necessarily true because a transfer of a business may be complete even though the purchaser does not choose to avail themself of all the rights they acquire. For example, a purchaser might decide to subsume the discrete business within their larger existing business. Alternatively, a purchaser might decide not to run the business at all, having acquired it to eliminate a competitor. An express assignment of goodwill is strong evidence of a transfer of the business to which it is attached but the absence of an express assignment of goodwill does not conclusively mean that there has been no disposal of a business. The absence of an assignment of business premises, trading stock or outstanding contracts is likewise not conclusive. Nor is it a conclusive factor whether the vendor continues to carry on business at other locations. However, a disposal of business activities conducted at one geographical location separate from those conducted at other locations is a relevant factor in determining whether what was sold was a discrete business in its own right.
76. If a purchaser has to add different, though similar, management functions or activities to the part of the business they acquire, this does not necessarily mean that they have not acquired a discrete business. It is just one aspect of the total circumstances of each case which have to be taken into consideration. Referring to some of the considerations referred to in the above paragraphs of TR 1999/16 in determining whether there has been a disposal of a discrete business, or part of a business capable of being a discrete business in its own right, it is considered that in the circumstances described in this Ruling, the Intangibles Transaction does not involve a disposal of a discrete business to the purchaser. Therefore, CGT event A1 does not happen in relation to the goodwill of SubCo after the Intangibles Transaction as there is no disposal of a CGT asset under subsection 104-10(1) of the ITAA 1997. Question 3 If the answer to Question 2 is "No", will CGT event C1 happen in relation to the goodwill of SubCo pursuant to subsection 104-20(1) of the ITAA 1997 upon a disposal of the 'Relevant Intangible Assets'? Detailed reasoning
CGT event C1happens if a CGT asset you own is lost or destroyed: subsection 104-20(1). It is stated in TR 1999/16: 18. A business or the sources of its goodwill may change so much it can no longer be said to be the same business as that previously conducted. In other words the old business ceases and a new business commences. If this happens the goodwill of the original business ceases to exist and a new CGT asset - being the goodwill of the new business - is acquired. 19. CGT event C1 in section 104-20 (about a loss or destruction of a CGT asset) happens in the situation in paragraph 18... 20. Whether the same business is being carried on is a question of fact and degree that ultimately depends on the circumstances of each particular case ...[emphasis added] 21. The business does not need to be identical from its acquisition to its disposal. If the essential nature or character of the business is not changed, the business remains the same business for the CGT goodwill provisions
[emphasis added]. A business owner may expand or contract its activities, or change the way in which a business is carried on, without ceasing to carry on the same business, provided the business retains its essential nature or character... 22. Nor would it be a different business if all that happens is that portions of the operations of a business are discarded in an ordinary commercial way but the business retains its essential nature or character. ... 24. It is not sufficient, however, if just a similar kind of business is carried on. It must be a business of the same essential nature or character that is carried on. The same business is not carried on if: (a) through a planned or systematic process of change within a reasonable period of time, a business changes its essential nature or character; or (b) there is a sudden and dramatic change in the business brought about by either the acquisition or the shedding of activities on a considerable scale. It is further elaborated in TR 1999/16:
91. It is a question of fact and degree whether the same business is being carried on. Factors to consider include the nature or character of the business, its location and size, the extent of changes in the assets and resources of the business, the activities of the business - whether the activities constitute, or are treated by the business owner as constituting separate or distinct activities, enterprises, divisions or undertakings - and the way in which the business is structured, carried on, managed and controlled... ... 94. The High Court in the Murry case considered it ' arguable
' [emphasis added] that the goodwill of the business of an inner Sydney hotel is not the same asset as it was two decades ago because, due to a marketing change and a resulting change in the class of customer patronising the business, it is not the same business as it was then. The High Court said the sources of the goodwill of a business may change and the part that various sources play in maintaining the goodwill may vary over the life of the business to such an extent it can no longer be said that the same business is carried on (98 ATC at 4595; 39 ATR at 143). The question whether a change of business occurs remains one of fact and degree, however, and a change in the nature of the clients of a business does not of itself mean the business is a new business with new goodwill. Many businesses naturally evolve by serving different clients or clients in different markets and offering improved products or services... It is noted that the High Court in Murry stated [at paragraph 45-46]:
The sources of the goodwill of a business may change and the part that various sources play in maintaining the goodwill may vary during the life of the business. But, as long as the business remains the "same business", the goodwill acquired or created by a taxpayer is the same asset as that which is disposed of when the goodwill of the business is sold or otherwise transferred. In determining whether the "same business" is being carried on, the sources of the goodwill may have changed so much that, although the business is of the same kind as previously conducted, it cannot be said to be the same business. In considering whether SubCo's business will retain its essential character, some of the factors that are relevant in determining this question of fact, as described in paragraph 91 of TR 1999/16, are considered with reference to the relevant facts and circumstances of this Ruling.
When considered in totality, the business has not changed such that it can be said to be no longer the same business. The Intangibles Transaction will not result in the business of SubCo changing its essential nature or character, or changing to such an extent that it is no longer the same business. Accordingly the goodwill of SubCo will not become 'lost or destroyed' for the purposes of section 104-20 and CGT event C1 will not occur. Question 4 If the answers to Questions 2 and 3 are "No", will CGT event C2 happen in relation to the goodwill of SubCo pursuant to subsection 104-25(1) of the ITAA 1997 upon a disposal of the 'Relevant Intangible Assets'? Detailed reasoning Under subsection 104-25(1), CGT event C2happens if your ownership of an intangible CGT asset ends by the asset: (a) being redeemed or cancelled; or (b) being released, discharged or satisfied; or (c) expiring; or (d) being abandoned, surrendered or forfeited; or (e) if the asset is an option - being exercised; or (f) if the asset is a *convertible interest - being converted.
Paragraphs 135-136 of TR 1999/16 states that where a business permanently ceases, CGT event C2 may also occur to the goodwill asset where a business ceases to operate, however, CGT event C1 is the more specific event in the circumstances (pursuant to subsection 102-25(1)). In the circumstances of the Intangibles Transaction, it is considered that there is no ending of the goodwill asset of SubCo in a manner contemplated under subsection 104-25(1). As such it is considered that there is no ending of the goodwill asset of SubCo in a manner contemplated under subsection 104-25(1). Therefore, CGT event C2 will not happen upon disposal of the 'Relevant Intangible Assets'.