In Australia, goodwill is treated as a CGT (Capital Gains Tax) asset under the Income Tax Assessment Act 1997 (ITAA 1997). Here’s how it works:
1. Goodwill is a CGT Asset
- Goodwill is specifically included in the definition of a CGT asset (s108-5 ITAA 1997).
- It cannot be separated from the business—it is considered a single, indivisible asset of the business as a whole.
2. CGT Event
- A CGT event happens when you dispose of a business (or part of it), because that includes disposing of its goodwill.
- The most common CGT event is CGT Event A1 (disposal of a CGT asset).
3. Cost Base and Capital Proceeds
- The cost base of goodwill is usually what you paid to acquire it (if you purchased the business).
- If the business was started from scratch, the cost base of self-generated goodwill is generally nil.
- The capital proceeds are what you receive from the buyer that can be reasonably attributed to the goodwill portion of the sale.
4. Exemptions and Concessions
Goodwill may be eligible for the small business CGT concessions, which can significantly reduce or eliminate tax payable on the gain:
- 15-year exemption (if you owned the business for at least 15 years and meet retirement/age conditions).
- 50% active asset reduction.
- Retirement exemption (up to $500,000 lifetime limit, even if you don’t retire, though if under 55 the amount must be contributed into super).
- Small business rollover (deferring the capital gain if reinvested in another active asset).
5. Goodwill Cannot Be Depreciated
- Unlike plant or equipment, goodwill is not depreciable. It’s only recognised for tax when a CGT event occurs.