Edited version of private advice

Authorisation Number: 1052371240298

Date of advice: 11 April 2025

Ruling

Subject: CGT - small business concessions - retirement exemption

Question 1

For the purposes of subparagraph 152-10(2)(c)(ii) of the ITAA 1997 will the loans owing to the Unit Trust by the Family Trust and Individual (loans), be included in calculating the net value of the CGT assets of the Unit Trust as the object entity, under section 152-15 of the ITAA 1997?

Answer 1

Yes.

Question 2

If the answer to question 1 is yes, is the value of the loan its market value just before the sale of the units in the Unit Trust?

Answer 2

Yes.

Question 3

For the purposes of subparagraph 152-10(2)(c)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) will the cryptocurrency assets be included in calculating the net value of the CGT assets of the Unit Trust as the object entity, under section 152-15 of the ITAA 1997?

Answer 3

Yes.

Question 4

For the purposes of subparagraph 152-10(2)(c)(ii) of the ITAA 1997 in calculating the maximum net asset test in section 152-15 of the Income Tax Assessment Act (ITAA 1997) will the value of the CGT assets of the Unit Trust be their market value just before the CGT event happens?

Answer 4

Yes.

Question 5

If the answer to question 4 is yes, will the total market value of the CGT assets of the Unit Trust be considered to be the same as the sale price of the units in the Unit Trust?

Answer 5

Yes.

Question 6

Does the object entity pass the $6,000,000 maximum net asset value test in section 152-15 of the ITAA 1997 using the assets described in question (1) and question (4) above?

Answer 6

No.

Issue 2

Question 1

Will the Commissioner allow further time under paragraph 103-25(1)(b) of the Income Tax Assessment Act 1997 ('ITAA 1997') for the Family Trust to choose to apply the small business retirement exemption under section 152-315 in respect of a capital gain made in the income year ended 30 June 2023?

Answer 1

Not applicable.

This ruling applies for the following:

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Background Facts

The applicant is a Unit Trust.

The Trustee of the Unit Trust is a company. Before the transaction an individual was the sole shareholder and director of the corporate trustee.

The Unit Trust operates a business that sells equipment. The business was established in MMYYYY and has continued for over XX years.

The Family Trust is a discretionary trust, who owned 100% of the units in the Unit Trust.

The trustee of the Family Trust is an individual. For the past X years, the Family Trust has only distributed income and capital to the Individual who is single with no dependents.

The Individual and the Family Trust are the only entities associated with the Unit Trust.

The Individual does not conduct a business.

The Individual controls all the entities.

Background Facts - the Trust

The assets and liabilities of the Unit Trust comprise of business assets.

The Unit Trust also had other entity assets, comprising cryptocurrency, and loans to the Family Trust (the unit holder) the individual.

The book value of the cryptocurrency before the contract of sale was approximately $XXX,XXX.

There were X loans which were an accumulation of amounts drawn down from the Unit Trust in excess to the beneficiary's entitlements. The value of the loans before the contract of sale was $X,XXX,XXX.

Estimated value of net assets

The estimated value of the net assets of the Unit Trust just before the contract of sale was executed is calculated to be $X.

The Unit Holder had a Business Loan for the sole purpose of acquiring additional units in the Unit Trust. The value of the loan was $X.

If the value attributable to the loans and cryptocurrency is excluded, the net asset value of the Unit Trust for the purposes of the maximum net asset value test is estimated as $X.

If the loan owing in the Family Trust of $X is included as a liability in the calculation of the net assets, the net assets will total approximately $X and under the $6m asset value.

Sale and Purchase agreement

In the 20YY financial year, the Unit Trust was approached by an unrelated, third party corporate entity to sell its operation.

An equity sale was negotiated, where all the units in the Unit Trust were sold.

The sale agreement included the business operational assets.

The sale agreement included the cryptocurrency.

The sale agreement did not include the loans owed to the Unit Trust.

A Deed of Forgiveness and Release was required to be executed, and the loan removed from the balance sheet, as a condition precedent to the sale.

The amount forgiven was recorded in the closing accounts of the Unit Trust as $X.

The cryptocurrency assets transferred to the purchaser, but no value was applied to the consideration of the units in the equity sale.

The Sale and Purchase Deed was signed on DDMMYYYY agreeing to the sale of the underlying units in the Unit Trust.

All of the underlying units in the Unit Trust were sold for $X to the Purchaser in an arm's length sale that settled on DDMMYYYY.

The Family Trust wishes to utilise the small business CGT concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) to reduce the capital gain.

The income tax return for the 20YY income has been lodged with a capital gain from the sale of the units included in the Family Trust's tax return.

No choice was made in the 20YY income year to apply the Small Business CGT concessions due to the uncertainty of their application to the circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act subsection 104-10(3)

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act subsection 152-10(1AA)

Income Tax Assessment Act subsection 152-10(2)

Income Tax Assessment Act paragraph 152-10(2)(c)

Income Tax Assessment Act subparagraph 152-10(2)(c)(ii)

Income Tax Assessment Act section 152-15

Income Tax Assessment Act section 152-20

Income Tax Assessment Act Subdivision 152-A

Income Tax Assessment Act section 152-10

Income Tax Assessment Act section 152-20

Income Tax Assessment Act section 104-10

Income Tax Assessment Act section 328-110

Income Tax Assessment Act section 328-125

Income Tax Assessment Act section 328-130

Income Tax Assessment Act section 960-400

Income Tax Assessment Act Subdivision 960-S

Reasons for decision

All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Issue 1

Questions 1-6

Detailed reasoning

Basic conditions for the small business CGT concessions

To qualify for the capital gains tax CGT small business concessions, you must satisfy several conditions that are common to all the concessions.

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

a)            a CGT event happens in relation to a CGT asset of yours in an income year

b)            the event would (apart from this Division) have resulted in the gain

c)             at least one of the following applies:

                              i.                you are a small business entity for the income year

                             ii.                you satisfy the maximum net asset value test

                            iii.                you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership

                           iv.                the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year

d)            the CGT asset satisfies the active asset test

The meaning of a 'CGT small business entity' is explained in subsection 152-10(1AA), which states that you are a CGT small business entity for an income year if:

a)            you are a small business entity for the income year; and

b)            you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million.

Subsection 328-110(1) defines 'small business entity' as follows:

You are a small business entity for an income year (the current year) if:

a)            you carry on a business in the current year, and

b)            one or both of the following applies:

(i)            you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million,

(ii)           your aggregated turnover for the current year is likely to be less than $10 million.

Where the CGT asset is shares in a company or an interest in a trust (object entity) there are additional basic conditions in subsection 152-10(2) that must be satisfied. The four requirements that must be fulfilled are set out in 152-10(2) as follows:

a)            the CGT asset would still satisfy the active asset test (see section 152-35) if the assumptions in subsection (2A) were made;

b)            if you do not satisfy the maximum net asset value test (see section 152-15) - you are carrying on a *business just before the *CGT event;

c)             either:

(i)            the object entity would be a *CGT small business entity for the income year; or

(ii)           the object entity would satisfy the maximum net asset value test (see section 152-15);

(iii)          if the following assumptions were made:

(iv)          the only CGT assets or *annual turnovers considered were those of the object entity, each affiliate of the object entity, and each entity controlled by the object entity in a way described in section 328-125;

(v)           each reference in section 328-125 to 40% were a reference to 20%;

(vi)          no determination under subsection 328.125(6) were in force;

d)            just before the CGT event, either:

(i)            you are a *CGT concession stakeholder in the object entity; or

(ii)           CGT concession stakeholders in the object entity together have a *small business participation percentage in you of at least 90%.

Of relevance is the operation of subparagraph 152-10(2)(c)(ii) which requires consideration of the maximum net asset value (MNAV) test in section 152-15 in relation to the object entity, in this case the Unit Trust.

Maximum net asset value test

The MNAV test in section 152-15 states:

You satisfy the maximum net asset value test if, just before the *CGT event, the sum of the following amounts does not exceed $6,000,000

(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).

Section 152-20 provides the meaning of net value of the CGT assets for the purposes of Section 152-15:

(1)           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:

(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; provisions for tax liabilities.

Meaning of 'Affiliate'

Section 328-130 provides that an individual or company is an affiliate of an entity where that individual or company acts, or could reasonably be expected to act:

•                     in accordance with the entity's directions or wishes in relation to the affairs of that individual or company's business, or

•                     in concert with the entity in relation to the affairs of the individual or company's business (subsection 328-130(1)).

The following requirements must be met for an entity to qualify as the entity's affiliate:

•                     the entity must be an individual or a company

•                     the entity must carry on a business, and

•                     in relation to its business affairs, the entity must act, or could reasonably be expected to act according to the directions or wishes of the entity or in concert with the entity.

The meaning of 'connected with'

The meaning of 'connected with' an entity is set out in section 328-125.

An entity is connected with another entity if:

•                     either entity controls the other entity in one of the ways specified in section 328-125, or

•                     both entities are controlled in a way described in section 328-125 by the same third entity.

Direct control of an entity other than a discretionary trust

Subsection 328-125(2) states:

An entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates:

(a)           except if the other entity is a discretionary trust - own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of:

(i)            any distribution of income by the other entity; or

(ii)           if the other entity is a partnership - the net income of the partnership; or

(iii)          any distribution of capital by the other entity; or

(b)           if the other entity is a company - own, or have the right to acquire the ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage) that is at least 40% of the voting power in the company.

At this point, regard must be had as to whether debts owed to the Unit Trust can be regarded as assets of the Trust.

Note 1 to section 108-5 includes 'debts owed to you' as an example of CGT assets.

In AAT Case [2010] AATA 591, Cannavo and FCT it was held that a debt owed to the taxpayer would be considered to be an asset of the taxpayer. Tribunal Member J Block commented at paragraph 11 'Debts are unquestionably assets as is clear having regard to section 108-5 of the Tax Act.'

Market value

The current taxation law does not define 'market value' in any general provision. However, section 995-1 states that market value has a meaning affected by Subdivision 960-S. The general rule is that the expression 'market value' is used in the income tax laws with its ordinary meaning (section 960-400), 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] HCA 82 (Spencer v The Commonwealth). In this case, 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 in Spencer v The Commonwealth that:

...the test of value of land is to be determined, not by inquiring about what price a man desiring to sell could have obtained for it on a given day, i.e. whether there was, in fact, on that day a willing buyer, but by inquiring: What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?

The definition of market value in Spencer v The Commonwealth identified the following principles:

•                     the purchaser is willing but not anxious to buy

•                     the seller is willing but not anxious to sell and

•                     the purchaser is assumed to be independent and dealing at arm's length with the seller.

The expression 'net value of CGT assets', as used in section 152-15, was also examined in Syttadel Holdings Pty Ltd v FC of T [2011] AATA 589 (Syttadel Holdings) and Venturi v FC of T [2011] AATA 588. In both cases, the Tribunal confirmed that the relevant enquiry was as to 'market value' according to its ordinary meaning, as noted in Spencer v The Commonwealth. 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 wasreleased by the Commissioner in February 2012. In that statement, the ATO generally considers the sale price of an asset to be its market value. However, 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 [2017] FCA 1396 found at paragraph 81 that:

Where the asset in question has been the subject of a recent arm's length sale, it is generally unnecessary to hypothesise. If the recent sale transaction can be said to be one between a willing but not anxious seller, and willing but not anxious buyer, the price that the buyer and seller actually agreed on may generally be taken to be the market price, or at least a reliable indicator, if not the best evidence, of the market price,

Guidance on the process to establish a market valuation for various taxation purposes is contained in ATO publication, Market Valuation for tax purposes. The guide outlines accepted principles of valuation, and supplements other advice and guidance provided by the ATO on valuation matters. In the publication, reference is made to the judicial interpretation of the term. The case of Spencer v The Commonwealth is summarised as recognising the following principles:

•                     the willing but not anxious vendor and purchaser;

•                     a hypothetical market;

•                     the parties being fully informed of the advantages and disadvantages associated with the asset being valued; and

•                     both parties being aware of current market conditions.

It is further noted that various valuation methods may be employed, but that valuations undertaken by persons experienced in their field of valuation would be expected to provide more reliable values than those provided by non-experts. Additionally, to ensure the objectivity of the report, the valuer should be independent of the interests of the party commissioning the report.

Part D of Market Valuation for tax purposes provides guidance on the content that is required in a market valuation report. The minimum requirements state that the valuation should:

•                     be replicable- in effect, this means the valuation should be documented against and explained well enough that another person or valuer can understand how the value was determined; and

•                     preferably be undertaken by a suitably qualified and experienced person in relation to the asset being valued.

Furthermore, a valuation report should be understandable, and objectively demonstrate the valuation process undertaken in accordance with valuation industry practices.

In relation to the market values of debts a general principle is that the value of a debt owed should be its book or face value. Senior Member Hack in Case 2/2010 [2010] AATA 455 said:

62.          Similarly, the issue of the value to be attributed to the inter-entity loans does not strictly arise given the conclusions I have reached however it may be readily disposed of in any event. I do not doubt that in an appropriate case the market value of a book debt may be an amount less than its face value; it might even have no market value. But where, as is the case here, there are inter-entity loans, it is too simplistic to reach a conclusion of the market value merely by reference to one entity. Regard would need to be had to the position of all of the entities. If value is to be determined by the notional winding up method it is unrealistic not to do so by reference to all related entities. Thus, had I reached the conclusion that the loans owed to the male director and the female director were net CGT assets of theirs, I would have brought them into account at their face value.

Senior Member Hack's comments indicated that a book debt should be brought into account at its face value (that is the book value).

Application to the facts

Question 1 - 6

Summary

The Unit Trust as the object entity does not satisfy the maximum net asset value test for the purposes of subparagraph 152-10(2)(c)(ii) as just before the CGT event, the net value of the Unit Trust's CGT assets exceeded the $6,000,000 threshold in section 152-15. As a result, the Family Trust does not meet the additional basic conditions in subparagraph 152-10(2)(c)(ii) and will not qualify for the small business CGT concessions.

Reasoning

For the Family Trust to qualify for small business CGT concessions, on the sale of the units in the Unit Trust, the additional basic conditions in subparagraph 152-10(2)(c)(ii) require the Unit Trust as the object entity, to satisfy a modified MNAV test.

Paragraph 152-10(2)(c) modifies the MNAV test by requiring that the following assumptions are made:

•                     the only CGT assets or annual turnovers considered are those of the object entity, its affiliates and those entities controlled by the company as described in section 328-125

•                     each reference in section 328-125 to 40% were a reference to 20% and

•                     no determination under subsection 328-125(6) were in force.

By applying these modifications to the Unit Trust, no other entities would be included as the Unit Trust has no affiliates, nor any entities it controls. This is because the Family Trust cannot be considered an affiliate since it is not an individual or a company. The Individual is not an affiliate as they do not carry on a business in their own capacity. The Unit Trust does not control another entity in the way described in section 328-125, and there is no determination under section 328-125(6) in force.

Therefore, in calculating the MNAV test as modified by subparagraph 152-10(2)(c)(iii), (iv) and (v), it is only the net value of the CGT assets of the Unit Trust as the object entity, that need to be considered. In calculating the net value of those assets under 152-20, liabilities of other entities cannot be considered.

Outstanding Loans

The Unit Trust had made 2 loans to the Family Trust that were outstanding. The loans were an accumulation of amounts drawn down in excess of the beneficiaries' entitlements. As a debt, the loans were a CGT asset of the Unit Trust at that time (Note 1 to section 108-5).

The disposal of the units in the Unit Trust triggered CGT event A1 (section 104-10) when the Sale and Purchase agreement was signed on DDMMYYYY (section 104-10(3)). Just before the CGT event the value of the loans was recorded in the balance sheet as $X. The outstanding loans owed to the Unit Trust were then forgiven and removed from the balance sheet, before settlement in satisfaction of a condition precedent to the sale settling.

In these circumstances the market value of the outstanding loans would be included in the calculation of the MNAV test under section 152-15 as they were CGT assets of the Unit Trust just before the sale contract was signed. A general principle holds that the value of a debt owed is its book or face value (Case 2/2010 2010 ATC 1-021), which in this case was recorded in the Unit Trust's Beneficiaries' Accounts as $X. This is the amount that would be used to calculate the net value of those CGT assets.

Cryptocurrency and business assets of the Unit Trust

The cryptocurrency and business assets of the Unit Trust, were identified under the Sale and Purchase agreement, and were assets of the Unit Trust just before the CGT event happened on DDMMYYYY. In determining the net value of the CGT assets, section 152-20 requires the market value of these assets less certain liabilities and provisions made by the Unit Trust be included. Only those liabilities and provisions made by the Unit Trust under section 152-20 would be considered as the Unit Trust had no connected entities or affiliates for the purposes of the modified MNAV test. Therefore, the Family Trust's business loan of $X would not be included as a liability related to the assets in the Unit Trust's calculation of their net value under 152-20.

In the present case, the units in the Unit Trust have been sold following negotiations with an unrelated and independent 3rd party in an arm's length deal. There is no evidence to suggest that the purchaser was associated with the Family Trust, and therefore, their interests are independent and objective from that of the Trust.

The general rule is that the expression 'market value' is used in the income tax laws with its ordinary meaning (section 960-400). The Commissioner generally considers the sale price of an asset to be its market value (DIS on Syttadel Holdings). The Sale and Purchase Deed listed the cryptocurrency and business assets of the Unit Trust as assets subject to the agreement, but expressly excluded the outstanding loans. In these circumstances where there is no market valuation to the contrary, the sale price of the units in the Unit Trust of $X is the best evidence of the market value of the units. that includes the listed assets. The sale price of the units is accepted as the market value of the listed assets for the purposes of calculating the modified MNAV test in section 152-15.

Therefore, both the sale price of the units together with the market value of the outstanding loans, are included in the calculation of the modified MNAV test in section 152-15.

$6 million maximum net asset test

For the Unit Trust to satisfy the MNAV test in section 152-15 (as modified by as modified by subparagraph 152-10(2)(c)(iii)), the net value of its CGT assets just before the CGT event cannot exceed $6,000,000.

Based on the information provided, just before the sale of the units by the Family Trust, the market value of CGT assets of the Unit Trust included:

•                     Cryptocurrency and business assets of the Unit Trust $ X

•                     Outstanding loans $ X

$ X

As the net value of these CGT assets totals $X which is more than the $6,000,000 threshold, the Unit Trust does not satisfy the MNAV test for the purposes of subparagraph 152-10(2)(c)(ii).

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