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Edited version of your written advice
Authorisation Number: 1051474392438
Date of advice: 18 January 2019
Ruling
Subject: Maximum net asset value test
Question
Is the market value of the Z Partnership enterprise as at dd mm 20XX $X.X million for the purposes of calculating the net value of the CGT assets owned by X Trust and Y Trust under the CGT small business concessions in Division 152 of the Income Tax Assessment Act 1997?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2018
The scheme commences on:
Dd mm 20XY
Relevant facts and circumstances
● X and Y founded a business in Australia retailing goods, called Z. The X Trust and Y Trust went into partnership together in month 20XY with Z Pty Ltd acting as the bare trustee of that partnership.
● Z markets many major brands.
● At its inception, the business employed a single staff member and stocked XX products. As at the valuation date it employs XX staff and stocks over 8000 products.
● In 20YY, Z expanded its operations by selling new products and opening a new store.
● There are no exclusive distribution arrangements. All products are sourced from wholesalers.
● Z has not developed any “house” brands or developed any proprietary products.
● As at dd mm 20XY, Z operated four stores and a warehouse facility.
● On dd mm 20XY, X Trust and Y Trust entered into an agreement to sell the business to Z Pty Ltd for around $12 million. The sale structure involved an overseas third party business, W, first acquiring Z Pty Ltd (the bare trustee), and then purchasing the business from the partnership via Z
● X and Y commissioned a market valuation report, which on dd mm 20YY determined that the market value of 100% of the issued capital in Z as at dd mm 20XY would be between $1.1 million to $1.5 million. The enterprise value arrived at was between $1.4 million to $2.2 million. The report asserted that the difference between the sale price and this alternative figure was due to the existence of “special value”.
● Both the valuation expert and W received the same financial information from Z.
● 0n dd mm 20YY, X Trust and Y Trust applied for a private ruling from the Tax Office, asking, on the basis of the valuation report: “Is the market value of the Z Partnership enterprise as at dd mm 20XY $X.X million for the purposes of calculating the net value of the CGT assets owned by X Trust and Y Trust under the CGT small business concessions in Division 152 of the Income Tax Assessment Act 1997?”
● An internal high level risk assessment of the valuation report was undertaken by the Tax Office. The risk assessment concluded that there was a high risk that the market valuation of 100% of the equity in Z was materially understated. It also concluded that a more accurate calculation of the market value of the Z enterprise was approximately $4 million.
● You have agreed that the market value of the Z enterprise as at dd mm 20XY is $X million.
● The value of the other assets held by X and Y is $X and $Y respectively.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 152
Income Tax Assessment Act 1997 Section 152-15
Reasons for decision
Section 152-15 of the Income Tax Assessment Act 1997 provides that the maximum net asset value test is satisfied if, just before the CGT event, the sum of the net value of the CGT assets owned by:
a) the principal entity
b) any entities connected with the principal entity, and
c) any affiliates of the principal entity or entities connected with such affiliates,
does not exceed $6 million.
X and Y commissioned a market valuation report which on dd mm 20YY determined that the market value of 100% of the issued capital in the Z business as at dd mm 20XY would be between $1.1 million to $1.5 million. The enterprise value arrived at was between $1.4 million to $2.2 million.
0n dd mm 20YY, you applied for a private ruling asking, based on this valuation report: “Is the market value of the Z Partnership enterprise as at dd mm 20XY $X.X million for the purposes of calculating the net value of the CGT assets owned by X Trust and Y Trust under the CGT small business concessions in Division 152 of the Income Tax Assessment Act 1997?”
An internal high level risk assessment of the valuation report was undertaken by the Tax Office. The risk assessment concluded that there was a high risk that the market valuation of 100% of the equity in Z was materially understated. It also concluded that a more accurate calculation of the market value of the Z enterprise was approximately $X million.
You have agreed that the market value of the Z enterprise as at dd mm 20XY is $X million.
The value of the other assets held by X and Y is $X and $Y respectively.
Accordingly, the maxim net asset value test in section 152-15 is satisfied, as just before the sale of the Z enterprise on dd mm 20XY, the sum of the net value of the CGT assets owned by:
a) X Trust and Y Trust (the principal entities);
b) any entities connected with the principal entities; and
c) any affiliates of the principal entity or entities connected with such affiliates,
does not exceed $6 million.