ATO Interpretative Decision
ATO ID 2009/49
Income Tax
Small Business Concessions: small business entity test - annual turnover - business carried on part year onlyFOI status: may be released
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This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
If a taxpayer carries on one business for the whole of an income year and a second business for only part of that same income year, does subsection 328-120(5) of the Income Tax Assessment Act 1997 (ITAA 1997) apply in working out the annual turnover of the taxpayer?
Decision
Yes. If a taxpayer carries on one business for the whole of an income year and a second business for only part of that same income year, subsection 328-120(5) of the ITAA 1997 applies in working out the annual turnover of the taxpayer. The provision is not limited to applying only where a taxpayer has ceased to carry on all their businesses.
Facts
A taxpayer carries on two businesses, 'Large Business' and 'Small Business'.
Early in the current income year the taxpayer disposes of all the capital gains tax (CGT) assets of Large Business and accordingly ceases to carry on Large Business at that time. The taxpayer continues to carry on Small Business for the whole of the income year.
The taxpayer carried on both businesses for the whole of the two previous income years. The taxpayer's aggregate turnover for each of the previous two income years was substantially in excess of $2 million.
The taxpayer's turnover for the current year (comprising the full-year turnover of Small Business and the part-year turnover of Large Business) was less than $2 million. However, if a reasonable estimate of what the full year turnover of Large Business would be but for its sale was taken into account, the taxpayer's turnover for the current year would be in excess of $2 million.
The taxpayer does not satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 at the relevant time and accordingly must determine if they satisfy the alternate '$2 million turnover test' to determine if they qualify for the small business capital gains tax concessions in Division 152 of the ITAA 1997.
Reasons for Decision
To qualify for the small business CGT concessions a taxpayer generally must satisfy either the maximum net asset test or be a small business entity (paragraph 152-10(1)(c) of the ITAA 1997).
To qualify as a small business entity for an income year a taxpayer must carry on business in that year and satisfy a $2 million aggregated turnover requirement (subsection 152-10(1AA) and section 328-110 of the ITAA 1997). Aggregated turnover for an income year is the sum of the relevant annual turnovers for the year of the taxpayer and certain related entities (excluding certain amounts) (section 328-115 of the ITAA 1997).
There are several ways a taxpayer may satisfy the $2 million aggregated turnover requirement. These are, if:
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- the taxpayer carried on business in the previous year and their aggregated turnover for the previous year was less than $2 million (subparagraph 328-110(1)(b)(i) of the ITAA 1997)
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- the taxpayer's aggregated turnover for the year they are seeking to be a small business entity (the current year), worked out generally as at the first day of the current year, is likely to be less than $2 million. However, the taxpayer cannot qualify as a small business entity under this provision if their aggregated turnover in each of the two previous years was $2 million or more (subparagraph 328-110(1)(b)(ii), subsection 328-110(2) and subsection 328-110(3) of the ITAA 1997), or
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- the taxpayer's aggregated turnover for the current year, worked out as at the end of the current year, is less than $2 million (subsection 328-110(4) of the ITAA 1997).
If a taxpayer does not carry on a business for the whole of an income year, the taxpayer's annual turnover for the income year must be worked out using a reasonable estimate of what the taxpayer's annual turnover for the income year would be if the taxpayer carried on a business for the whole of the income year (subsection 328-120(5) of the ITAA 1997).
On the facts of this case, the taxpayer does not satisfy subparagraph 328-110(1)(b)(i) of the ITAA 1997 as their aggregated turnover for the previous year was not less than $2 million. They are also precluded from satisfying subparagraph 328-110(1)(b)(ii) of the ITAA 1997 because their aggregated turnover for each of the two previous years was $2 million or more.
Subsection 328-120(5) of the ITAA 1997 effectively provides for extrapolating the part year turnover of a business to a full year equivalent where that business is not carried on for the whole of an income year. The intent of the provision is to ensure the true size of a business is taken into account in determining whether the $2 million turnover requirement is satisfied.
Subsection 328-120(5) of the ITAA 1997 refers to a taxpayer that does not carry on a business for the whole of an income year rather than to a taxpayer that does not carry on any business for the whole of an income year. The reference to 'a business' in subsection 328-120(5) of the ITAA 1997 recognises that a taxpayer may carry on more than one business in an income year and may cease one of those businesses during the year. Accordingly, subsection 328-120(5) of the ITAA 1997 applies to a situation where a taxpayer carries on two or more businesses and ceases to carry on one of those businesses during an income year while still carrying on another business for the whole of the income year. The provision is not limited to applying only where a taxpayer has ceased to carry on all their businesses.
A reasonable estimate of what the full year turnover of Large Business would have been must therefore be taken into account in working out the taxpayer's annual turnover for the current year. On this basis, the taxpayer's aggregated turnover for the current year is not less than $2 million and accordingly they do not satisfy subsection 328-110(4) of the ITAA 1997.
The taxpayer therefore does not satisfy the $2 million turnover test and hence does not qualify for the small business CGT concessions in Division 152 of the ITAA 1997.
Amendment History
| Date of Amendment | Part | Comment |
|---|---|---|
| 23 February 2018 | Reasons for Decision | To include recently enacted subsection 152-10(1AA) of the ITAA 1997 |
| Legislative references | Updated subsection 152-10(1AA) |
Year of income: Year ending 30 June 2009
Legislative References:
Income Tax Assessment Act 1997
Division 152
paragraph 152-10(1)(c)
subsection 152-10(1AA)
section 152-15
section 328-110
subparagraph 328-110(1)(b)(i)
subparagraph 328-110(1)(b)(ii)
subsection 328-110(2)
subsection 328-110(3)
subsection 328-110(4)
section 328-115
subsection 328-120(5)
Keywords
Capital gains tax
CGT small business relief
Small business 50% reduction
Date reviewed: 29 January 2018
ISSN: 1445-2782
| Date: | Version: | |
| 12 May 2009 | Original statement | |
| You are here | 23 February 2018 | Updated statement |