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Could a capital gain which arose on the disposal of goodwill of a sole practice be disregarded under paragraph 104-10(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) because the practice commenced before 20 September 1985?

No. Any goodwill which the taxpayer disposed of was not acquired by the taxpayer on the date when the taxpayer initially established the practice (a date before 20 September 1985). The goodwill would have been acquired by the taxpayer on the date when the practice was transferred back to the taxpayer (a date after 20 September 1985). Consequently, the capital gain could not be disregarded under paragraph 104-10(5)(a) of the ITAA 1997.

The taxpayer, a sole practitioner, established a practice before 20 September 1985.

After 20 September 1985, the taxpayer incorporated a proprietary limited company which acquired the practice and employed the taxpayer.

Several years later the company disposed of the practice to the taxpayer.

The taxpayer disposed of the practice in the year of income ended 30 June 2001.

The practice was established by the taxpayer before 20 September 1985. The taxpayer operated the practice in the their own right for many years. After 20 September 1985 the taxpayer incorporated a proprietary limited company which acquired the practice. The taxpayer continued on as an employee of the company.

The change in the operating structure from an individual to a company involved a change in the ownership of the practice. There was a cessation of a business carried on by the practitioner and a commencement of the carrying on of a business by the company.

The taxpayer ceased to carry on the business and became an employee of the business. Any goodwill created by the personal attributes of the taxpayer now belonged to the company and remained with the company while the taxpayer was an employee of the company. The company acquired the practice after 20 September 1985. Any goodwill associated with the business would have been acquired by the company on the date that it acquired the practice.

Several years later the practice was transferred back to the taxpayer. There was a cessation of a business carried on by the company and a commencement of the carrying on of a business by the taxpayer. The taxpayer acquired any goodwill of the business on the date of the transfer. This remains so despite the fact that the personal attributes of the taxpayer were always a source of the goodwill of the business.

Any goodwill which the taxpayer sold in the year of income ended 30 June 2001 was acquired from the company after 20 September 1985. A capital gain which arose on the disposal of the goodwill could not be disregarded.