AUWhat is goodwill in a business sale
General information, not financial, tax or legal advice. Ask your accountant how goodwill should be apportioned in your sale agreement, before you sign.
Goodwill is what a buyer pays for a business over and above the value of its identifiable assets: the premium for its reputation, its customers, its systems, its trained staff and its location, none of which show up as a line item on their own. When you value a business, business.gov.au counts goodwill among its intangible assets, things that can't be touched but are still valuable, alongside intellectual property and brands1. For tax purposes, goodwill is a single capital gains tax (CGT) asset in its own right. See the tax guide for how a sale is taxed.
How goodwill is calculated
In practice, a sale agreement commonly works out goodwill as price paid minus the fair value of identifiable net assets: the fair value of everything that can be separately identified and valued is subtracted from the total price, and what is left over is treated as goodwill.
The ATO's ruling on the goodwill of a business (TR 1999/16) sets out a preferred approach to valuing goodwill on the sale of a profitable business or a business expected to be profitable: the difference between the present value of the business's predicted earnings and the market value of off balance sheet assets and its identifiable net assets other than goodwill2. The ATO accepts the parties' own allocation to goodwill only if, among other things, they do not put into goodwill an amount that belongs to an off balance sheet asset or another identifiable asset2. That allocation affects how both the buyer and the seller are taxed, which is why it belongs to an accountant, not to a negotiation over a number that "sounds right."
Goodwill itself is treated as one CGT asset, even though it is made up of many different sources working together (customer relationships, reputation, location, systems), rather than being split into separate assets for tax purposes2.
When goodwill is disposed of
Goodwill only changes hands when the business, or a discrete part of it a buyer could run, is sold2. Selling individual assets separately from the business, without transferring the business the goodwill is attached to, does not dispose of the goodwill2. The most specific CGT event when a business permanently ceases is CGT event C1, which happens to the business's goodwill2. This is one reason the structure of a sale, not just the price, matters for tax.
Goodwill and the small business CGT concessions
Goodwill is treated as an active asset when it is inherently connected with the business it belongs to3. That matters because the active asset test is one of the basic conditions for the small business CGT concessions, including the small business 15-year exemption. The 15-year exemption can disregard the entire capital gain on an asset continuously owned for the 15-year period ending just before the sale, where you, or the significant individual if you are a company or trust, are 55 or older and the sale happened in connection with your retirement, or are permanently incapacitated, subject to the other conditions being met4. The active asset test itself requires the asset to have been active for at least half of the test period, if the asset has been owned for 15 years or less, or for 7.5 years if it has been owned for more than 15 years3.
What is not goodwill
- Plant, equipment and fit-out, valued separately.
- Stock on hand, valued separately, usually close to settlement.
- Intellectual property or contracts that can be separately identified and valued.
- Cash and receivables, which are not usually part of a business sale at all.
Everything in that list gets its own value in the sale agreement. Goodwill is what is left once all of it is accounted for, which is also why a buyer who wants to lower the price will often argue about what belongs on this list, not about goodwill itself. See multiples and earnings for how the overall price is usually arrived at before it is apportioned, and business valuers for when that apportionment needs an independent valuation behind it.
Sources
- Value your business, business.gov.au, no last-updated date shown, accessed 24 Sep 2026. Confirms intangible assets, things that can't be touched but are still valuable, include intellectual property, brands and business goodwill.
- TR 1999/16 - Income tax: capital gains: goodwill of a business, Australian Taxation Office, consolidated version with addendum TR 1999/16A, last amended 28 November 2001, accessed 24 Sep 2026. Confirms goodwill is a single CGT asset, sets out the preferred approach to valuing goodwill (the present value of predicted earnings less the market value of identifiable net assets other than goodwill), confirms the ATO will accept the parties' own allocation to goodwill only if, among other conditions, they do not allocate to goodwill an amount properly attributed to an off balance sheet asset or another identifiable asset (para 43), confirms goodwill is only disposed of when the business, or a discrete part of it a buyer could run, is disposed of, and confirms CGT event C1 is the most specific event that happens to goodwill when a business permanently ceases.
- Active asset test, Australian Taxation Office, last updated 2 February 2026, accessed 24 Sep 2026. Confirms an intangible asset is active if inherently connected with the business, and that the active asset test requires at least half of the test period (15 years or less of ownership) or 7.5 years (more than 15 years of ownership).
- Small business 15-year exemption, Australian Taxation Office, last updated 6 June 2023, accessed 24 Sep 2026. Confirms the 15-year exemption can disregard a capital gain on an asset continuously owned for at least 15 years where you, or the significant individual if you are a company or trust, are 55 or older and the event happened in connection with your retirement, or are permanently incapacitated, subject to the basic conditions.