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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1051349998566

Date of advice: 19 March 2018

Ruling

Subject: Capital gains tax

Question 1

Will the purchase price received by the taxpayer, which is not apportioned to plant and equipment, stock, debtors or WIP, be treated as capital proceeds in respect of the disposal of the goodwill of the business under Part 3-1 of the Income Tax Assessment Act 1997 and be taxed as a capital gain to the extent the capital proceeds exceed the relevant cost base?

Answer

Yes

Question

Is the market value of the business for the purposes of the $6,000,000 Maximum Net Asset Value Test $!@ in section 152-15 of the ITAA 1997 (pursuant to the independent valuation of the vendor)?

Answer

No

This ruling applies for the following period:

1 July 2017 to 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

Relevant legislative provisions

Part 3-1 of the Income Tax Assessment Act 1997

Section 102-5 of the Income Tax Assessment Act 1997

Section 152-15 of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Section 108-5 of the Income Tax Assessment Act 1997

Subdivision 152-A of the Income Tax Assessment Act 1997

Section 152-10 of the Income Tax Assessment Act 1997

Section 152-15 of the Income Tax Assessment Act 1997

Section 152-20 of the Income Tax Assessment Act 1997

Section 960-400 of the Income Tax Assessment Act 1997

Subdivision 960-S of the Income Tax Assessment Act 1997

Reasons for decision

Capital Gains Tax (CGT)

CGT provisions are found in Part 3-1 of the ITAA 1997. The CGT provisions are catch-all provisions. They apply to all gains that arise as a result of a CGT event happening (whether or not the gains are of a capital nature), subject to certain exemptions and exceptions, and to territorial and temporal limitations.

The CGT rules affect a taxpayer's income tax liability because assessable income includes a net capital gain for the income year (section 102-5 of the ITAA 1997). A net capital gain is the total of a taxpayer's capital gains for an income year, reduced by certain capital losses made by the taxpayer. A capital loss cannot be deducted from a taxpayer's assessable income, but it can reduce a capital gain in the current income year or a later income year.

To work out a capital gain, the cost base for the CGT asset is subtracted from the capital proceeds. If the capital proceeds exceed the cost base, the difference is a capital gain. If there is no capital gain, the capital proceeds are subtracted from the reduced cost base of the asset. If the reduced cost base exceeds the capital proceeds, the difference is a capital loss. If the capital proceeds are less than the cost base but more than the reduced cost base, there is neither a capital gain nor a capital loss.

If a taxpayer's total capital gains for an income year are more than the sum of the taxpayer's total capital losses for the income year and unapplied net capital losses from previous years, the taxpayer has a net capital gain for the income year equal to the difference.

Alternatively, if the taxpayer's total capital losses for the income year are more than the taxpayer's total capital gains for the income year, the taxpayer has a net capital loss for the income year equal to the difference.

CGT event

Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states a CGT asset is any kind of property, or a legal or equitable right that is not property. CGT assets include:

The Trust’s goodwill, stock, plant and equipment are assets of the trust.

Section 104-10 of the ITAA 1997 states CGT event A1 happens if a taxpayer disposes of a CGT asset. The disposal of a CGT asset takes place if a change of ownership occurs from the taxpayer to another entity.

The Purchaser is acquiring all assets of the Trust (including goodwill, stock, plant and equipment etc) and this triggers CGT event A1.

Small Business Concessions

Section 152-10 of the ITAA 1997 contains the basic conditions that a taxpayer must satisfy to be eligible for the small business capital gains tax (CGT) concessions. These conditions are:

Maximum net asset value test

The maximum net asset test is stated in section 152-15 of the ITAA 1997:

Section 152-20(1) of the ITAA 1997provides the meaning of net value of the CGT assets for the purposes of section 152-15 of the ITAA 1997:

Market value

The current taxation law does not define 'market value' in any general provision. However, section 995-1 of the ITAA 1997 states that market value has a meaning affected by subdivision 960-S of the ITAA 1997. The general rule is that the expression 'market value' is used in the income tax laws with its ordinary meaning (section 960-400 of the ITAA 1997), but that does not fix its meaning to all contexts. As a result, market value usually takes the ordinary meanings given below, unless specifically defined or qualified by a particular provision.

The most common definition for market value is derived from the High Court case of Spencer v The Commonwealth of Australia (1907) 5 CLR 418 (Spencer). It was held that a valuation of land should be based on the price that a willing purchaser at the date in question would have had to pay to a vendor 'not unwilling, but not anxious to sell'.

In looking to apply the concept of a 'willing buyer and willing seller' to ascertain the market value of land, Griffith CJ commented at 432 in Spencer that:

The expression 'net value of CGT assets', as used in section 152-15 of the ITAA 1997, was examined in Syttadel Holdings Pty Ltd v FC of T 2011 ATC 10-199 (Syttadel Holdings) and Venturi v FC of T 2011 ATC 10-200. In both cases, the Tribunal confirmed that the relevant enquiry was as to ‘market value’ according to its ordinary meaning, as noted in Spencer. In Syttadel’s case the most appropriate methodology for calculating market value was considered to be by an objective business valuation.

A Decision Impact Statement (DIS) on Syttadel Holdings was released by the Commissioner in February 2012. In that statement, the ATO generally considers the sale price of an asset to be its market value. That DIS goes on to note however, that in each particular case, all the relevant facts and circumstances must be taken into account to determine the most appropriate methodology for calculating market value.

In Excellar Pty Ltd v FCT [2015] AATA 282, the AAT held that the selling price of a particular parcel of land was the best evidence of its market value at the relevant date.

More recently in the Federal Court, Wigney J in FCT v Miley 17 ATC 20-640 found at para 81 that:

Conclusion

The disposal of the Trust’s assets is an A1 event and the CGT regime applies. The purchase price will be treated as the capital proceeds.

In assessing your eligibility for small business CGT concessions under section 152-15 of the ITAA 1997, the market value of the Business for the purposes of the $6,000,000 Maximum Net Asset Value Test must be determined.

We acknowledge the independent valuation you have provided and your view that the Purchaser is willing to pay a premium for the Business as they believe it has strategic value to their mid to long term business plan, the size and nature is appropriate to their business and has potential for growth in net profit which they project can be achieved once assimilated into their group. However, it is the view of the Commissioner that the purchase price of $!@#% is still the best evidence of market value.


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