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Edited version of private advice
Authorisation Number: 1012652152811
Ruling
Subject: CGT - maximum net asset value test
Question 1
For the purposes of applying the maximum net asset value (MNAV) test in section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997), is the entitlement of X to an amount from the Trust, to the extent that entitlement remains unpaid as at the time of the CGT event, a liability of the Trust that relates to the assets of the Trust for the purposes of paragraph 152-20(1)(a) of the ITAA 1997?
Answer
Yes
Question 2
If the answer to Question 1 is no, for the purposes of applying the MNAV test, is X's entitlement a capital gains tax (CGT) asset that would need to be included in the net value of assets of X?
Answer
Not applicable
Note: This ruling does not deal with, and cannot be taken as expressing a view in respect of, the application (or otherwise) of Division 7A of Part III of the Income Tax Assessment Act 1936 with regards to the unpaid entitlement.
This ruling applies for the following period:
Year ending 30 June 2014
The scheme commenced on:
1 July 2013
Relevant facts and circumstances
The Trust entered into an arrangement to sell a CGT asset (the CGT event).
The CGT event resulted in a capital gain.
The Trust wishes to apply the small business concessions to the part of the capital gain remaining after applying the general CGT discount.
X is a connected entity of the Trust.
Just before the CGT event, X's had entitlements to amounts from the Trust that remained unpaid (commonly referred to as an unpaid present entitlement or UPE):
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 152-15
Income Tax Assessment Act 1997 Section 152-20
Reasons for decision
Section 152-15 of the ITAA 1997 explains that you satisfy the MNAV test if, just before the CGT event, the sum of the following amounts does not exceed $6 million:
a) the net value of the CGT assets of yours;
b) the net value of the CGT assets of any entities connected with you;
c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)).
Subsection 152-20(1) of the ITAA 1997 provides that the net value of the CGT assets of an entity is the amount obtained by subtracting from the sum of the market values of those assets the sum of:
a) the liabilities of the entity that are related to the assets; and
b) the following provisions made by the entity:
i. provisions for annual leave;
ii. provisions for long service leave;
iii. provisions for unearned income;
iv. provisions for tax liabilities.
Taxation Determination TD 2007/14 provides the Commissioner's opinion as to what liabilities are to be included in the calculation of the 'net value of CGT assets' within the context of subsection 152-20(1) of the ITAA 1997. Paragraph 1 of TD 2007/14 states:
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 legal or equitable obligations to pay either a sum certain or ascertainable sums…
We consider X's UPE represents a present obligation of the Trust to pay a certain or ascertainable sum. Accordingly, the UPE is considered to be a liability for the purpose of subsection 152-20(1) of the ITAA 1997.
Is the UPE related to the assets of the Trust?
TD 2007/14 provides at paragraphs 21 and 22:
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.
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.
The UPE relates to the assets of the Trust in the general sense as described in TD 2007/14.
Accordingly, the UPE owing to X is a liability that relates to the assets of the Trust. In accordance with paragraph 152-20(1)(a) of the ITAA, it will be subtracted from the market value of the relevant assets of the Trust when determining the net value of assets of the Trust for the purposes of the MNAV test.
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