Edited version of your written advice

Authorisation Number: 1012979122360

Date of advice: 1 March 2016

Ruling

Subject: Small business CGT concessions

Question 1

Can the trustee for the Trust use the market valuation of the business to determine their eligibility for the small business CGT concessions using the maximum net asset value test in Division 152 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2015.

The scheme commences on:

The scheme has commenced.

Relevant facts and circumstances

You have applied for a private binding ruling on behalf of your client the Trust.

The facts describing the scheme are as follows:

1. The Trust operates a business, which it commenced in November 20XX.

2. The Trust entered into an agreement to sell its business to the Purchaser. Settlement of the sale occurred in April 20XX.

3. The sale price for the business was more than $7,000,000. The sale price was allocated to the assets of the business as follows:

- Goodwill $7,000,000

- Plant and Equipment $500,000

Total $7,500,000

4. The sale resulted in CGT event A1 happening to the goodwill on the date of the sale contract being XX March 20XX. This crystallised a gross capital gain for the Trust equal to the full amount of the capital proceeds referrable to the goodwill; that is more than $7,000,000. The trust does not have any material cost base for the goodwill.

5. The 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.

6. The trust is relying on the maximum net asset value test in section 152-15 of the ITAA 1997 to be able to receive concessional CGT treatment.

7. The net asset value of the Trust for the purposes of the maximum net asset value test, ignoring the value attributable to Goodwill, is approximately $1,500,000.

The valuation

8. On 6 March 20XX, the Trust commissioned a valuer to prepare a valuation of the goodwill of the business.

9. The Tax Office valuations experts reviewed the valuation and advised that it materially undervalued the business.

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.

Reasons for decision

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

(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 a capital gain;

(c) At least one of the following applies:

…

(ii) you satisfy the maximum net asset value test

(d) The CGT asset satisfies the active asset test.

You are claiming entitlement to the 50% active asset reduction on the basis that you satisfy the "maximum net asset value test" in section 152-15.

The maximum net asset value test is stated in section 152-15 and is as follows:

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 that the net value of the CGT assets is the "market value" of those assets.

The expression "market value" is used in the income tax laws with its ordinary meaning (section 960-400). The most common definition for market value is derived from Spencer v. Commonwealth (1907) 5 CLR 418. In that 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 Syttadel Holdings Pty Ltd v. FC of T 2011 ATC 10-199, the AAT confirmed, in the context of "net value of CGT assets", that the relevant inquiry was as to market value according to its ordinary meaning, as noted in Spencer.

In that case, the most appropriate methodology for calculating market value was considered to be by way of an objective business valuation.

The ATO Decision Impact Statement on Syttadel in February 2012 stated that the ATO generally considers the sale price of an asset to be its market value. However, in each particular case, 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. FC of T [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 Miley v. FC of T 2016 ATC 10-418, it was held that it is often the case, but not always, that the actual selling price of an asset at a particular time represents its market value just before that time.

In the present case, you have argued that the purchase price paid by the purchaser for the business represents special value and is there not the best evidence of its market value at the relevant date. You seek to rely on the valuation in support of this contention.

The Tax Office valuations experts reviewed the valuation and advised that it materially undervalued the business, notwithstanding that special value may be present.