ATO Interpretative Decision

ATO ID 2004/206 (Withdrawn)

Income Tax

CGT small business concessions: maximum net asset value test - net value of the CGT assets - contingent liabilities
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This ATO ID is withdrawn as the ATO view on this matter is now reflected in Draft Taxation Determination 2006/D27.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Does the term 'liabilities' in the calculation of 'the net value of the CGT assets' of an entity in subsection 152-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997) include contingent liabilities?

Decision

No. The term 'liabilities' in the calculation of 'the net value of the CGT assets' of an entity in subsection 152-20(1) of the ITAA 1997 does not include contingent liabilities.

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, provisions for employee leave entitlements and provisions for income tax were recorded as liabilities in the company's accounts.

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).

The term 'liabilities' as used in subsection 152-20(1) of the ITAA 1997 to determine the net value of the CGT assets of an entity, has its legal meaning. It extends to a legally enforceable debt which is due for payment and to a presently existing obligation to pay either a sum certain or an ascertainable sum. It does not extend to contingent liabilities, future obligations or expectancies.

Amounts that are within the accounting meaning of the term 'liabilities' but not within its legal meaning, are therefore not within the scope of the term as used in subsection 152-20(1) of the ITAA 1997.

Examples of amounts that are accordingly not included in the net asset calculation include the following:

•: provisions for long service and annual leave entitlements;
•: provisions for income and other taxes; and
•: accounting liabilities arising as a result of receiving prepaid income.

Accordingly, the company cannot take into account such amounts in determining the net value of its CGT assets under subsection 152-20(1) of the ITAA 1997.

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 2004/205
ATO ID 2004/207

Keywords
Basic conditions for relief
CGT assets
CGT events
Capital gains tax
CGT small business relief
Contingent liabilities
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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