Photo by JF Martin on Unsplash

Australia’s tax consolidation regime enables a 100% wholly owned group of companies to be taxed like a single taxpayer. Basically, the head company of the group is treated as a single entity and it files a tax return addressing all of the income, deductions and assets for the whole group.

Despite their extensive scope, the regime’s provisions still do not deal adequately or expressly with various capital gains tax (CGT) issues that arise when a subsidiary in a tax-consolidated group is spun-off or demerged, exiting the group. Our article deals with the CGT issues that arise in relation to three types of intangible assets commonly or potentially held by exiting subsidiaries, namely:

  • Trade receivables;
  • Intellectual property rights; and
  • Goodwill.

Receivables and intellectual property rights

In order to establish the tax liability of the head company of a tax-consolidated group when shares in a subsidiary are transferred to a third party outside the group, a notional cost base for these shares must be worked out. The cost base of the shares is determined largely by the cost base of the subsidiary’s assets, but there are difficulties with how some assets are treated.

The Australian Taxation Office (ATO) view seems to be that trade receivable assets that arise from contracted services performed (but yet to be paid for) have a cost base of zero. For example, ATO Interpretative Decision ID 2005/211 states: ‘the first element of the cost base and reduced cost base of a debt that arises from the provision of services [to a debtor] is nil.’ Interpretive Decisions are anonymised decisions of the ATO about particular taxpayers, and they provide non-binding guidance for taxpayers.

ATO ID 2005/211 has recently been withdrawn (without any fanfare), but the position that it adopts does not seem to have been expressly repudiated by the ATO. It continues to be referenced in other ATO publications, which have not been withdrawn. It is also consistent with the general conclusion expressed by the ATO in binding CGT Tax Determination TD 60 that: ‘Where an asset is constructed or created by the taxpayer, no value can be attributed to that labour for inclusion in the cost base of the asset’.

If correct, this means that a head company that has already paid income tax on receivables (worth, potentially, millions of dollars), as they accrued over time, may be further exposed to CGT on the economic value of the very same receivables because they will be treated as an asset of a leaving subsidiary.

This potential double tax conundrum has not escaped the attention of the Australian tax community or the ATO. However, the government has yet to implement a legislative ‘fix’ for this issue.

In our article, we point out that a change to the law is not actually necessary. This is because the muddled ATO view about receivables that has led to this problem seems to be based on a misapplication of a case from 1985 (Case S43, 85 ATC 343) that involved charitable, rather than contractual, services.

Our article spells out in detail why contractual services should be approached differently to charitable services. We also explore how a provision in Australia’s Income Tax Assessment Act 1997 alternatively could apply to relieve double taxation in the scenario described above.

Where contractual services (trade receivables) lead to the recipient being granted intellectual property rights, it is difficult to see how no ‘property’ is given in exchange for the trade receivables that arise from the supply of such services (which, in essence, seems to have been the ATO’s contention). That would enable establishment of a cost base, preventing double taxation.


Our article is one of the few that explore how business goodwill is to be treated when a subsidiary in a tax-consolidated group is spun-off or demerged.

Australia’s High Court in the recent case of Placer Dome (2018) has reiterated the legal definition of goodwill of a business as comprised of sources which have the purpose and result of adding value to, or generating earnings for, the business, through increasing demand for its goods or services by attracting custom. That is not simply ‘every’ positive advantage or ‘whatever’ adds value, or necessarily synonymous with the going (concern) value of the business.

As goodwill is property at law, it is a taxable asset for CGT purposes. The correct tax treatment of goodwill is important because its value may be significant. Goodwill may have a value in the billions of dollars for large businesses, as noted in that High Court case.

Our article discusses a number of goodwill issues that are not addressed by Australia’s tax consolidation regime. These include:

  • What happens when a subsidiary leaves a group with some of the group’s business assets, and thus with some of the business activities that give rise to the group’s overall goodwill? Specifically, if none (or only some) of the original assets that gave rise to the custom that produced the goodwill remain in a group after corporate departures from the group, is it still the case that the original goodwill remains with the group?
  • Where business trademarks are owned by one subsidiary and relevant statutory operating licences held by another, and no single entity is responsible for servicing all the group’s customers, does the goodwill held by the group’s head company constitute a separate new goodwill asset rather than a combination of the constituent assets?
  • Does the separation of the sources of goodwill among subsidiaries in a tax‑consolidated group inadvertently result in the destruction of what is previously a single goodwill asset, since no particular entity now holds this single asset?
  • Might a group continue to recognise goodwill that is acquired from a subsidiary that joins the group if the subsidiary’s business (or a significant part of the business, together with the ensuing custom) ceases to be relevant upon the subsidiary becoming part of the group, or at some later time?
  • Alternatively, where goodwill arises primarily from trademarks (as may be the case for consulting or online trading businesses), and there are few physical or other intangible assets in a business that has been acquired, does the original goodwill of the acquired business cease to exist if there is a dramatic change in the sources of the business that attract custom?

For the tax geeks who are interested, our article then goes on to query whether the cost base of CGT assets, such as goodwill, of a subsidiary in a tax-consolidated group should, upon the spin-off of the subsidiary, be determined using either:

  • The original cost base, as determined by the Income Tax Assessment Act’s entry history rule; or
  • The reset cost base, as determined under the Income Tax Assessment Act’s provisions regarding the ‘tax cost setting amount’.

As we explain in our article, the ramifications of the approach that is adopted are not merely academic. For instance, as a matter of tax policy and economic substance, a head company should arguably be entitled to recognise the value which it in fact has given in acquiring a subsidiary, where that subsidiary was acquired through an arm’s length transaction with a third party, regardless of the underlying cost base of the goodwill that is held by the subsidiary.

Is tax reform needed?

We present some plausible solutions to these problems in our article. The issues that we have identified above could also be addressed by parliamentary fixes to the Income Tax Assessment Act’s tax consolidation regime. However, legislative reform might be more easily said than done. As one wise judge has perceptively observed:

‘The presence of ameliorating provisions is conducive to a particular ordering of business and personal affairs in order to have the advantage of them. Apart from challenging the limits of human comprehension, one of the difficulties of the contemporary preference for intricacy in the [Income Tax Assessment Act 1997] is the difficulty of predicting in advance and making related provision in advance for all of the ways in which this ordering of affairs might occur.’


This post is a high-level summary of the material canvassed in the article — “Capital Gains Tax Issues with Respect to Various Intangibles upon Deconsolidation” (2019) 34(3) Australian Tax Forum: A Journal of Taxation Policy, Law and Reform 551.

Leave a comment

Your email address will not be published. Required fields are marked *