Income tax: capital gains: small business concessions: what 'liabilities' are included in the calculation of the 'net value of the CGT assets' of an entity in the context of subsection 152-20(1) of the Income Tax Assessment Act 1997?
Please note that the PDF version is the authorised version of this ruling.This ruling is being reviewed as a result of a recent court/tribunal decision. Refer to Decision Impact Statement: Commissioner of Taxation v Byrne Hotels Qld Pty Ltd (QUD 280 of 2010 ).This document has changed over time. View its history.
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This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, we must apply the law to you in the way set out in the ruling (unless we are satisfied that the ruling is incorrect and disadvantages you, in which case we may apply the law in a way that is more favourable for you - provided we are not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you.
[ Note: This is a consolidated version of this document. Refer to the Legal Database (http://law.ato.gov.au) to check its currency and to view the details of all changes.]
1. The term 'liabilities' in the context of subsection 152-20(1) of the Income Tax Assessment Act 1997 has its ordinary meaning. 'Liabilities' extend to legally enforceable debts due for payment and to presently existing obligations to pay either a sum certain or ascertainable sums. It does not extend to contingent liabilities, future obligations or expectancies.
|Plant and machinery||1,500,000|
|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|
|Plant and machinery||1,500,000|
|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|
- provision for possible damages payout;
- unbilled expenses (business consultant); and
- provision for rebates.
(Note: Although the provision for leave of employees is not a liability, it is separately taken into account under paragraph 152-20(1)(b) to determine the net value of CGT assets.)
|Fixtures and fittings||300,000|
|Freehold premises in Parramatta||3,500,000|
|Freehold premises in Penrith||2,500,000||6,300,000|
|Mortgage (secured over Parramatta premises)||500,000|
|Bill of exchange for Penrith premises||400,000||1,500,000|
|Net value of CGT assets:||4,800,000|
6. The fixtures and fittings may be depreciating assets and the gains from them may be treated as income rather than capital gains but they are still CGT assets. Hence, they are included in the calculation of the net value of CGT assets of Pretty in Pink Pty Ltd.
8. Cassandra operates a dancing school. Five years ago, Fancy Foot Pty Ltd, which is wholly owned by Cassandra, bought a dancing studio where she conducts the dancing school. Fancy Foot Pty Ltd has no other CGT assets. The studio has a current market value of $5 million with $0.5 million of the loan used to purchase the studio still outstanding.
9. Last year, Wanadance Pty Ltd, also wholly owned by Cassandra, bought a warehouse to store dancing costumes and stage materials. Wanadance Pty Ltd has no other CGT assets. The market value of the warehouse subsequently fell, and is now $2 million. $2.8 million of the loan to purchase the warehouse is still outstanding.
11. Both Fancy Foot Pty Ltd and Wanadance Pty Ltd are connected with Cassandra for the purposes of small business concessions. Cassandra has no small business CGT affiliates. She has other CGT assets, which have a net value of $1 million.
|Net value of CGT assets of Cassandra||$1.0m|
|Net value of CGT assets of Fancy Foot Pty Ltd - Studio: ($5m less $0.5m)||$4.5m|
|Net value of CGT assets of Wanadance Pty Ltd - Warehouse: ($2m less $2.8m)||($0.8m)|
|Total net value of CGT assets:||$4.7m|
13. Cassandra qualifies for the small business CGT concessions because she satisfies the $5 million maximum net asset value test. Note that the $0.8 million excess liability in respect of Wanadance Pty Ltd's CGT asset (the warehouse) can be offset against the value of Cassandra's assets or Fancy Foot Pty Ltd's CGT asset (the studio).
Date of effect
14. This Determination applies to years commencing both before and after its date of issue. However, it does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of the determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).
Commissioner of Taxation
9 May 2007
Appendix 1 - Explanation
|This Appendix is provided as information to help you understand how the Commissioner's view has been reached. It does not form part of the binding public ruling.|
15. One of the basic conditions that must be satisfied to qualify for the small business CGT concessions is the maximum net asset value test in section 152-15. Under this test, the net value of the CGT assets of the taxpayer and certain related entities must not exceed $5 million just before the relevant CGT event.
- the liabilities of the entity that are related to the assets; and
- the following provisions made by the entity:
- provisions for annual leave
- provisions for long service leave
- provisions for unearned income, and
- provisions for tax liabilities (subsection 152-20(1)).
17. The term 'liabilities' is not defined for the purposes of the 'net value of the CGT assets' definition. Accordingly, it has its ordinary meaning reflecting the context in which it is used. The Macquarie Dictionary, revised 3rd edition, defines liability to mean: 'an obligation, especially for payment; debt or pecuniary obligation'.
18. In the context of subsection 152-20(1), 'liabilities' extend to legally enforceable debts due for payment and to presently existing obligations to pay either a sum certain or ascertainable sums. The term does not extend to contingent liabilities, future obligations or expectancies.
19. A 'contingent liability' is a liability which will become due only on the occurrence of an event that may or may not happen. An example is a possible obligation to pay damages in future if the judgment in a pending lawsuit is unfavourable.
- provisions for possible obligation to pay damages in a pending lawsuit;
- provisions for liabilities in respect of an earn-out contract;
- provisions for guarantee of a loan;
- provisions for long service and annual leave entitlements;
- provisions for income and other taxes prior to the liability arising;
- 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 rebates and the like.
(Note: provisions for annual leave, provisions for long service leave, provisions for unearned income and provisions for tax liabilities are not within the meaning of the term 'liabilities' but are separately taken into account in determining the net value of the CGT assets of an entity.)
Liabilities that are related to the assets
21. The 'liabilities of the entity that are related to the assets' in subsection 152-20(1) include liabilities directly related to particular assets that are themselves included in the calculation, for example, a loan to finance the purchase of business premises.
22. The 'liabilities of the entity that are related to the assets' also include liabilities that, although not directly related to one particular asset, are related 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.
24. As noted in the Treasurer's Press Release No. 38 of 2006 (9 May 2006), the Board of Taxation's report on its Post-Implementation Review of the small business CGT concessions contains a number of administrative recommendations. This Taxation Determination is part of the Commissioner's response to Recommendation 6.1 of the Board's report.
25. The Board's report also contains a number of legislative recommendations. Taxation Laws Amendment (2006 Measures No. 7) Act 2007, which received Royal Assent on 12 April 2007, gives effect to the Board's legislative recommendations accepted by Government. The changes apply to CGT events happening in the 2006-07 income year or later income years. There are two changes relevant to this Determination:
- amended subsection 152-20(1) allows the possibility of a negative net value of the CGT assets of any entity to be calculated; and
- new paragraph 152-20(1)(b) allows provisions for annual leave, provisions for long service leave, provisions for unearned income and provisions for tax liabilities to be taken into account in determining the net value of the CGT assets of an entity but does not affect the meaning of the term 'liabilities' as discussed in this Determination.
Appendix 2 - Alternative views
|This Appendix sets out alternative views and explains why they are not supported by the Commissioner. It does not form part of the binding public ruling.|
Alternative view: accounting meaning of 'liabilities'
27. The Commissioner considers the term 'liabilities' should not have its accounting meaning in the context of subsection 152-20(1) as, unlike the thin capitalisation provisions in Division 820, for example, where the term has its accounting meaning (see Taxation Ruling TR 2002/20), there are insufficient contextual factors for that interpretation.
All legislative references are to the Income Tax Assessment Act 1997 unless otherwise indicated.
basic conditions for relief
capital gains tax
CGT small business relief
maximum net asset value test
The Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW
Treasurer's Press Release No. 38 of 2006