ATO Interpretative Decision

ATO ID 2004/205 (Withdrawn)

Income Tax

CGT small business concessions: maximum net asset value test - net value of the CGT assets - liabilities 'related to' the assets
FOI status: may be released

This ATO ID is withdrawn as the ATO view on this matter is now reflected in Draft Taxation Determination 2006/D27.

This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Do the words 'liabilities of the entity that are related to the assets' in the calculation of the net value of the CGT assets of an entity under subsection 152-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997), require each liability to be directly related to a particular asset?

Decision

No. The words 'liabilities of the entity that are related to the assets' in the calculation of the net value of the CGT assets of an entity under subsection 152-20(1) of the ITAA 1997, do not require each liability to be directly related to a particular asset. The liabilities may relate to the assets of the entity more generally.

Facts

The taxpayer company carries on business. Two individuals each own 50% of the shares in the company.

The company sold a business asset on 31 October 2003 and is considering the possible application of the small business capital gains tax (CGT) concessions in Division 152 of the ITAA 1997. In order to qualify for these concessions, the company must, among other things, determine if it satisfies the $5 million maximum net asset value test. In considering that test, the taxpayer must determine the net value of its CGT assets and that of certain related entities.

Just before the company sold the asset, the company's liabilities included a bank overdraft used in the operation of the business and an income tax liability arising from an income tax assessment that issued on 20 October 2003.

Reasons for Decision

One of the basic conditions that must be satisfied to qualify for the small business CGT concessions is the $5 million maximum net asset value test in section 152-15 of the ITAA 1997. Broadly, 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 'net value of the CGT assets' of an entity is the amount (if any) by which the sum of the market values of those assets exceeds the sum of the liabilities of the entity that are related to the assets (subsection 152-20(1) of the ITAA 1997).

Liabilities that may be taken into account include liabilities that are directly related to particular assets that are themselves included in the calculation, for example, a loan to finance the purchase of business premises. On the other hand, a liability that is directly related to an asset that is not included in the calculation cannot be taken into account. For example, a loan to acquire an asset used solely for personal use and enjoyment will not be included because the asset itself will not be included in the test.

The words 'liabilities of the entity that are related to the assets' also include liabilities that are not directly related to only one particular asset, but which relate to the assets of the entity more generally - for example, a bank overdraft or other short term financing facilities that provide working capital for the operation of the business. Incurred tax liabilities (but not contingent tax liabilities, provisions for tax or the like) of an entity carrying on a business, may also reasonably be seen as being related to the assets of that entity for the purposes of determining the net value of the CGT assets of that entity.

Accordingly, the words 'liabilities of the entity that are related to the assets' do not require each liability to be directly related to a particular asset.

Note: As subsection 152-20(1) of the ITAA 1997 is directed at determining the net value of the CGT assets on an entity by entity basis and refers to 'the liabilities of the entity' the liabilities of one entity can not be taken into account in determining the net value of the CGT assets of another entity.

Date of decision: 23 December 2003

Year of income: Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   Division 152
   section 152-15
   subsection 152-20(1)

Related ATO Interpretative Decisions
ATO ID 2004/206
ATO ID 2004/207

Keywords
Basic conditions for relief
Capital gains tax
CGT assets
CGT events
CGT small business relief
Maximum net asset value test

Business Line: Losses and Capital Gains Tax Centre of Expertise

Date of publication: 5 March 2004

ISSN: 1445-2782

history

	Date:	Version:
	23 December 2003	Original statement
You are here	16 June 2006	Archived

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