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Edited version of private ruling

Authorisation Number: 1011821313956

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Ruling

Subject: Net value of CGT assets

Question

Are your personal income tax liabilities for the previous income year taken into account as a liability for the purpose of calculating the net value of your capital gains tax (CGT) assets under subsection 152-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are beneficiaries of a discretionary trust.

In the current income year, the trust entered into an agreement to dispose of shares held in a private company.

You have personal income tax liabilities for the previous income year.

You are connected with the trust for the purposes of subsection 328-125(1) of the ITAA 1997.

The distributions made to you by the trust for the previous income year included dividends received from the private company.

You had not lodged your income tax returns for the previous income year, and no assessments had issued for the previous income year, as at the date of the disposal of the shares.

You did not make any provision in relation to your tax liability for the previous income year as at the date of the disposal of the shares.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 152-20

Income Tax Assessment Act 1997 Subsection 328-125(1)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

The maximum net asset value test in section 152-15 of the ITAA 1997 requires that the net value of the CGT assets of certain entities be determined as at 'just before the CGT event'. Subsection 152-20(1) of the ITAA 1997 states that the net value of the CGT assets of an entity is the amount (whether positive, negative or nil) obtained by subtracting from the sum of the market values of those assets the sum of:

In order for your personal income tax liabilities for the previous income year to be included in the net value of your CGT assets as at 'just before the CGT event', these liabilities will need to be included by either paragraph 152-20(1)(a) or 152-20(1)(b) of the ITAA 1997.

Paragraph 152-20(1)(a) of the ITAA 1997

Paragraph 152-20(1)(a) of the ITAA 1997 includes the liabilities of the entity that are related to the assets in the net value of the CGT assets of an entity.

Taxation Determination TD 2007/14 discusses 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 ITAA 1997.

Paragraph 1 of TD 2007/14 states that the term 'liabilities' in the context of subsection 152-20(1) of the ITAA 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.

Paragraph 20 of TD 2007/14 provides provisions for income and other taxes prior to the liability arising as an example of amounts that are not included in 'liabilities' for the purposes of determining the 'net value of the CGT assets' of an entity.

Paragraph 25 of TD 2007/14 states that new paragraph 152-20(1)(b) of the ITAA 1997 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 the Determination.

Income tax only becomes due, in the sense of that the taxpayer comes under a legal obligation to pay it, upon an assessment being made and served (Clyne v. Deputy Commissioner of Taxation (1981) 150 CLR 1; 81 ATC 4429; (1981) 12 ATR 173, and Deputy Commissioner of Taxation v. Broadbeach Properties Pty Ltd and Neutral Bay Pty Ltd [2008] HCA 41; (2008) 69 ATR 357).

As at and 'just before' the CGT event, being the date on which the trust disposed of the shares, you did not have any liabilities in relation to income tax for the previous income year for the purposes of subsection 152-20(1) of the ITAA 1997. No assessment for the previous income year had issued as at this date and you therefore did not have a legally enforceable debt due for payment or any presently existing obligation in relation to your income tax for that income year as discussed in paragraph 1 of TD 2007/14. Any liability in relation to income tax for that income year would have only been a contingent liability or a future obligation or expectancy at the time of the CGT event.

As you did not have any income tax liabilities just before the CGT event in relation to the previous income year that are related to CGT assets, your personal income tax liabilities for the previous income year are not included in the net value of your CGT assets under paragraph 152-20(1)(a) of the ITAA 1997.

Paragraph 152-20(1)(b) of the ITAA 1997

Paragraph 152-20(1)(b) of the ITAA 1997 includes provisions made by an entity for tax liabilities in the net value of the CGT assets of the entity.

The Explanatory Memorandum (EM) to the Taxation Laws Amendment (2006 Measures No. 7) Act 2007 states at paragraph 1.24 that the maximum net asset value test allows the net asset value of an entity to be reduced by certain provisions, including provisions for tax liabilities. These amounts are not included as liabilities because they are not present legal obligations, but are relevant to the value of the business, having regard to commercial business valuation methods.

The EM provides the following example in relation to provisions made by a taxpayer who is carrying on a business:

Example 1.4

Hanna has CGT assets with a value of $7.2 million, liabilities relating to the assets of $1.1 million and has made provisions for $100,000 of annual leave for her employees, $20,000 for unearned income and $50,000 for tax liabilities for the financial year. Hanna has a net asset value of $5.93 million.

In your case, you did not make any provision for your income tax liabilities for the previous income year as at the date of the disposal of the shares, and your personal income tax liabilities for the previous income year are therefore not included in the net value of your CGT assets under paragraph 152-20(1)(b) of the ITAA 1997

Summary

Any personal income tax liabilities that you might now have in relation to the previous income year will not be taken into account as a liability for the purpose of calculating the net value of your CGT assets under subsection 152-20(1) of the ITAA 1997.

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