• Meaning of net value of CGT assets

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    The net value of the CGT assets of an entity is the amount (whether positive, negative or nil) worked out by taking the:

    Sum of the market values of those assets

    less

    any liabilities of the entity that are related to those assets

    If you are a partner in a partnership and the CGT event happens in relation to an asset of yours or a CGT asset of the partnership (for example, disposal of a partnership asset), the maximum net asset value test would include:

    • all the assets of the partnership if you are connected with it, and you would exclude the value of your interest in the partnership, or
    • only your interest in the partnership if you are not connected with it, you would not count the assets of the partnership as a whole.

    Entities that hold shares or trust interests would calculate their maximum net asset value test in a similar way.

    What assets are included in the net value of the CGT assets?

    Assets to be included in determining the net value of the CGT assets are not restricted to business assets. They include all CGT assets of the entity, unless the assets are specifically excluded (see What assets are not included?).

    In the case of a dwelling, an individual only includes the current market value of a dwelling in their net assets to the extent that it is reasonable - having regard to the amount that the dwelling has been used to produce assessable income which gives rise to deductions for interest payments or would give rise to deductions for interest if interest had been paid.

    The individual would be entitled to deduct part of the interest on money they borrowed to buy the home if:

    • part of the home is set aside exclusively as a place of business and is clearly identifiable as such, and
    • that part of the home is not readily adaptable for private use - for example, a doctor's surgery located within a doctor's home.
    Attention

    This is a hypothetical interest deductibility test. If the individual did not actually incur any interest, the test looks at whether they would have been entitled to a deduction if they had taken out a loan to purchase their home.

    End of attention

    If the dwelling has had some income producing use, the percentage of income producing use is multiplied by the current market value to work out the value of the dwelling that should be included. This will take into account the length of time and percentage of income producing use of the dwelling.

    Example

    Ben owns a house that has a market value of $750,000 just before applying the net assets test. Ben owned the house for 12 years - for the first three years, 20% of it was used for producing assessable income, for the following two years it was used 40% for producing assessable income, for two years it was used solely as a main residence and for the last five years it was used 10% for producing assessable income.

    Ben's dwelling has had 15.8% income producing use.

    (3/12 x 20%) + (2/12 x 40%) + (2/12 x 0%) + (5/12 x 10%).

    Ben will include $118,750 in his net assets ($750,000 x 15.8%)

    Ben has a liability of $500,000 attached to the house. Therefore, 15.8% ($79,166) of the liability is also included in the calculation of the net assets.

    Attention

    Although gains from depreciating assets may be treated as income rather than capital gains, depreciating assets are still CGT assets and are, therefore, included when calculating the net asset value.

    End of attention

    What liabilities are included in the net value of the CGT assets?

    Liabilities to be included in determining the net value of the CGT assets include:

    • legally enforceable debts due for payment
    • presently existing obligations to pay either a certain sum or ascertainable sums, and
    • the following provisions
      • provisions for annual leave
      • provisions for long service leave
      • provisions for unearned income, and
      • provisions for tax liabilities.
       

    However, contingent liabilities are not included in the calculation. A contingent liability is a liability that will become due only on the occurrence of an event that may or may not happen.

    Examples of amounts that are not included in 'liabilities' for the purposes of determining the 'net value of the CGT assets' of an entity include:

    • provisions for possible obligations to pay damages in a pending lawsuit
    • provisions for liabilities in respect of an earn-out contract
    • provisions for the guarantee of a loan
    • accounting liabilities arising as a result of receiving prepaid income
    • expenses that are not yet due, and
    • provisions in general for such things as quantity rebate.

    What liabilities are related to the assets?

    A liability must be related to the CGT assets of an entity to be taken into account in determining the net value of the CGT assets of the entity.

    This includes liabilities directly related to particular assets that are themselves included in the calculation - for example, a loan to finance the purchase of business premises. It also includes liabilities not directly related to a particular asset but rather to the assets of the entity more generally - for example, a bank overdraft or other short-term financing facility that provides working capital for the operation of the business. Liabilities that are directly related to an asset that is excluded from the net asset calculation are, however, excluded.

    Example

    Cool Tool Pty Ltd is selling its business. The assets and liabilities of the company are as follows:

    Assets:

    $

    $

    Plant and machinery

    1,500,000

     

    Freehold premises

    3,500,000

    5,000,000

    Liabilities:

    Mortgage (secured over the premises)

    2,000,000

     

    Provision for leave of employees

    500,000

     

    Unbilled expenses (business consultant)

    200,000

     

    Provision for rebates

    200,000

     

    Provision for possible damages payout

    100,000

    3,000,000

    Net assets:

     

    2,000,000

    The net value of the CGT assets of the company is calculated as follows:

    Assets:

    $

    $

    Plant and machinery

    1,500,000

     

    Freehold premises

    3,500,000

    5,000,000

    Liabilities:

       

    Mortgage (secured over the premises)

    2,000,000

     

    Provision for leave of employees

    500,000

    2,500,000

    Net value of CGT assets:

     

    2,500,000

    The following items are not taken into account in working out the net value of the CGT assets of Cool Tool Pty Ltd because they are contingent liabilities, future obligations or expectancies:

    • provision for possible damages payout
    • unbilled expenses (business consultant), and
    • provision for rebates.
     
    Last modified: 30 Jun 2009QC 27964