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Ruling
Subject: Small business 15 year exemption
Question
For the purposes of paragraph 152-125(1)(b) of the Income Tax Assessment Act 1997, can a payment to a significant individual include a journal entry to increase an existing loan?
Answer
No.
This ruling applies for the following period:
Year ending 30 June 2013
The scheme commences on:
1 July 2012
Relevant facts and circumstances
The company made a capital gain.
It was concluded that the conditions of subdivision 152-B of the Income Tax Assessment Act 1997 were satisfied and the company claimed the 15 year exemption in relation to the capital gain.
The company now seeks to distribute the capital gain to its shareholders, including CGT concession stakeholders.
The company intends to record the payment in its books of account by way of crediting the amounts to the benefit of the individual concerned, rather than an application of cash.
The individual has lent money to the company; the payment would be applied to increase the amount of money the company owes the individual.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 152-110 and
Income Tax Assessment Act 1997 paragraph 152-125(1)(b).
Reasons for decision
A capital gain (the exempt amount) may be disregarded under section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) if certain conditions are satisfied. The conditions require the company to make one or more payments in relation to the exempt amount within 2 years after the relevant CGT event to an individual who was a CGT concession stakeholder just before the event. The payment(s) are also exempt and therefore not taken into account in determining the individual's taxable income (section 152-125 of the ITAA 1997).
ATO ID 2006/132 deals with whether a journal entry constitutes a payment.
The majority of cases that consider whether a journal entry is a payment refer to the principal stated in Re Harmony and Montague Tin & Copper Mining (Spargo's case) (1873) LR 8 LR Ch App 407. In Spargo's case it was held that a payment will occur where two parties both have a present liability or legal obligation to the other (mutual liabilities or mutual obligations) and they make an agreement and set off the liabilities against each other using a book entry.
A journal entry will only constitute a payment if there are mutual liabilities between the taxpayer and the company and there is an agreement between those parties to offset the liabilities.
In this case, there is not a mutual liability as the significant individual does not owe money to the company. The company intends to record the payment in its books of account to increase an amount the company owes to the significant individual. This journal entry does not constitute a payment for the purposes of paragraph 152-125(1)(b) of the ITAA 1997.