Edited version of private ruling

Authorisation Number: 1011862811844

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Ruling

Subject: Capital Gains Tax - maximum net asset value test

Question

In ascertaining whether the Capital Gains Tax (CGT) small business concessions may be available in respect of the disposal of shares, is the value of the shares their historical cost for the purposes of the maximum net asset value test in section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The taxpayer and his spouse both acquired shares in their own private company some years ago. The shares of each were acquired for a certain amount. The taxpayer is now planning to sell the shares to another party for significantly more than their acquisition cost. The taxpayer's spouse will likewise be disposing of their shareholding.

All other assets owned by the taxpayer and spouse are valued at less than $6 million. Both the taxpayer and spouse satisfy all other tests to claim the fifteen year exemption.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-10 ,

Income Tax Assessment Act 1997 Section 152-15 and

Income Tax Assessment Act 1997 Section 152-20 .

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 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

Unless otherwise stated, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997.

Summary

If another entity has acquired the shares in an arm's length dealing for a certain consideration, that figure would be taken to be the net value of the shares just before the CGT event. The figure for which the shares had been originally acquired represents their historical cost but is no longer their value just before the CGT event.

Detailed reasoning

The basic conditions that must be satisfied to obtain access to the CGT small business concessions are described in section 152-10. One of the basic conditions, set out in paragraph 152-10(1)(c), is that you must be either a small business entity for the relevant income year, a partner in a partnership that is a small business entity in respect of that year and the CGT asset is an asset of the partnership or, alternatively, you satisfy the maximum net asset value test.

The terms of the maximum net asset value test are specified in section 152-15. It states that the $6 million threshold which must not be exceeded includes the net value of your CGT assets as well as of entities connected with you and your affiliates and entities connected with your affiliates.

Section 152-20 details what is mean by the 'net value of CGT assets'. Specifically, the net value of the CGT assets of an entity is determined by subtracting from the market values of those assets any liabilities of the entity that relates to those assets.

In the present case, you have disposed of your shareholding in a private company and wish to know whether you satisfy the maximum net asset value test. The net value of your assets includes the market value of your shares in the private company and you wish to know what the value of those shares would be for the purposes of section 152-15.

Section 152-15 states that the asset values used in determining whether you pass the test is the value of your relevant assets just before the CGT event in question. In this case, the CGT event is the sale of the shares. Therefore, the relevant value of the shares is their market value (less liabilities) just before their sale.

Where the shares have been disposed of other than by sale, their market value at that time would need to be established. However, where the shares have been sold at arm's length their net value at that point is readily ascertainable.

The term 'market value' is defined by the International Valuation Standards Committee as being,

….the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction, after proper marketing, wherein the parties had each acted knowledgably, prudently and without compulsion.

If another entity has acquired the shares in an arm's length dealing for a certain consideration, that figure would be taken to be the market value of the shares just before the CGT event. Indeed, just before the CGT event is the point in time at which the buyer determined upon the price which they would offer for the shares which, all other factors being equal, is the price which a fully informed buyer would be prepared to pay for them at that time.

Consequently, the market value of the shares just before the CGT event would be the agreed selling price. The figure for which the shares had been originally acquired represents their historical cost but is no longer their value just before the CGT event however, it will from part of the asset's cost base.