Edited version of private ruling

Authorisation Number: 1011895663952

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Maximum net asset value test

Question

Do you satisfy the maximum net asset value test under section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997) just before the CGT event in which you disposed of the property?

Answer

No

This ruling applies for the following period:

1 July 2010 - 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The Taxpayer was registered as a company prior to 1985.

Prior to 1985 the Taxpayer purchased a property for primary production purposes.

The property has been the only significant asset of the Taxpayer since that time (other than related business assets such as stock, plant and equipment and cash for the business).

The Taxpayer had previously listed the property for sale. The property did not sell during the period the property was listed.

By contract the Taxpayer agreed to sell the property to Local Council for a price in excess of $6 million, above the previously listed price.

The Taxpayer did not in any way solicit the offer from the Council.

The Taxpayer has valuations of the property for significantly less than what the Council paid. Due to the Taxpayers reluctance to sell, the Council increased its offer a number of times due to the location of the property.

A valuation commissioned by the Council in purchasing the property valued the property below the offer price.

Initially, the Taxpayer wanted to retain some of the land. The Council increased the amount of the purchase price a number of times to obtain the Taxpayer's agreement to dispose of the entire property.

Eventually, the Council advised the Taxpayer that the price could not be increased any further and if the Taxpayer did not agree to the sale, the State would be required to resume the land.

If this occurred, the Taxpayer was informed that it would take some time until the Council could inform the Taxpayer what the compensation price would be. At this time the Taxpayer accepted the Council's offer to acquire the entire property.

The property meets the requirements to be considered an active asset owned by the Taxpayer, and the Taxpayer and its connected entities have no other significant assets or liabilities that would be counted toward the maximum net asset value test.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-15

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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

In order to satisfy the maximum net asset value test during the year ended 30 June 2011, section 152-15 of the ITAA 1997 requires that just prior to the CGT event, the following amounts must not exceed $6 million:

· the net value of CGT assets of yours;

· the net value of the CGT assets of any entities connected with you

· the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates

In your case, your business, the predominant asset of which was your farming property was acquired by an arms length purchaser. You have argued that the purchaser for special reasons was prepared to pay an amount far in excess of what you believed the true market value to be. In your view the market value of the asset was significantly lower than the final purchase price.

Market value

In Brisbane Water County Council v Commr of SD (NSW) 80 ATC 4051, Waddell J indicated that the market value is the best price which may reasonably be obtained for the property if it was sold in the general market. He went further to say that the value of an item of property is its value in the general market with three qualifications, namely:

1. If there is no general market, as in the case of shares in a private company, such a market is to be assumed;

2. All possible purchasers are to be taken into account, even a purchaser prepared for his own reasons to pay a fancy price;

3. The value to be ascertained is the value to the seller.

Further, market value of an asset should be assessed with regard to the highest and best use of the asset as recognised in the market. The concept of highest and best use takes into account any potential for a use that is higher than the current one.

The current use of an asset may not reflect its optimal value. Optimal value is defined by the International Valuations Standards Committee as:

the most probable use of a property which is physically possible, appropriately justified, legally permissible, financially feasible, and which results in the highest value of the property being valued.

It is sometimes argued that an asset has special value to a particular buyer. Usually this is not relevant in deriving a market value. Where there is clear evidence that the special value is known or available to the wider market, this would be reflected in an objective valuation of the asset. If a special value is known and available to one potential buyer and not known or available to the wider market, it will not be reflected in market value.

In your case, although the purchaser may have applied a special value to your land, that special value was also known to the wider market at the time the offer was made. In this case, Council had expressed the intention to develop your site. Additionally, the land did not have a special attribute known only to the purchaser. All of the qualities and attributes of the land would have been known to the wider market at the time.

The market value of the land is considered to be its ultimate selling price. The realised price was arrived at by the market determining the highest and best use of that asset. Whilst it is acknowledged that other potential buyers were prepared to pay significantly less, their potential use of the property would not have been considered the highest and best use and this was accordingly reflected in the amount that they were prepared to pay to acquire the property.

The company and its connected entities do not have any other significant assets or liabilities.  

As the value of the property just prior to the CGT event was greater than $6 million you do not satisfy the maximum net asset value test under section 152-15 of the ITAA 1997.