ATO Interpretative Decision

ATO ID 2002/766

Capital Gains Tax

• This ATO ID has been amended due to the withdrawal of TR 93/15
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Can the small business relief provisions of Division 152 of the Income Tax Assessment Act (ITAA 1997) apply to a contingent and unascertainable amount which, depending on the performance of the business sold, is payable in the future?

Decision

No. The small business relief provisions of Division 152 of the ITAA 1997 cannot apply to the amount payable in the future as the amount will not relate to the disposal of an active asset within the meaning of section 152-40 of the ITAA 1997.

Facts

The taxpayer was a company. The taxpayer's business assets, including goodwill, were sold to an unrelated entity pursuant to a Deed of Sale and Purchase agreement.

The Deed provided for the immediate payment of an agreed monetary amount and for a further contingent and unascertainable sum payable in accordance with a formula based on the future performance of the business.

Reasons for Decision

Capital proceeds are defined in subsection 116-20(1) of the ITAA 1997 to be money received or receivable plus the market value of any property received in relation to the CGT event.

At the time the taxpayer's business was sold it received cash and property in the form of a contingent right to a future payment. This right is a separate CGT asset acquired by the taxpayer at the time when its business assets were sold. Note paragraph 17 of Taxation Ruling TR 93/15:

'17. The seller has received a lump sum and a right to be paid a further amount of money on an event occurring. The right is a contractual promise that has been obtained for value and is capable of being assigned. It is a right of a proprietary nature. The seller receives or becomes entitled to receive that right at the time of the disposal of the asset. Accordingly, the seller has received both an amount of money and property other than money (paragraph 160ZD(1(c); Marren v Ingles[1980] 3 All ER 95).'

At the future point in time, when a payment is received in relation to the right, CGT event C2 under section 104-25 of the ITAA will occur. Payments received by the taxpayer based on the performance of the business represent the proceeds for the disposal, or at least part disposal of the right and should not be confused with the capital proceeds for the sale of the business goodwill (and other business assets).

When CGT event C2 occurs the right will not have been used or be held ready for use in the course of carrying on a business, or connected with a business being carried on by the taxpayer. Therefore, the right, while being part of the capital proceeds for the disposal of the taxpayer's business assets will not, at the time of the CGT event C2, be an active asset itself, within the meaning of section 152-40 of the ITAA.

Consequently, the taxpayer will fail to satisfy the basic conditions for small business relief within section 152-10 of the ITAA 1997 and the concession contained in Division 152 of the ITAA 1997 cannot apply.

Year of income:  Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 104-25
   subsection 116-20(1)
   Division 152
   section 152-10
   section 152-40

Case References:
Marren v. Ingles
    [1980] 3 All ER 95

Other References:
National Taxation Liaison Group Capital Gains Tax Subcommittee Minutes of Meeting 28 November 2001.

Keywords
Capital gains tax
Capital gains
Disposal of assets
Disposal of business
Centres of Expertise
CGT small business relief
Basic conditions for relief
Small business 50% reduction
CGT events
CGT event A1-disposal of a CGT asset
Active asset test

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  31 July 2002

ISSN: 1445-2782