Issue
Is the taxpayer, a private company, in making eligible termination payments under subsection 152-325(1) of the Income Tax Assessment Act 1997 ('ITAA 1997'), required to make payments to the maximum extent possible from an instalment if capital proceeds are received in instalments?
Decision
Yes. The taxpayer, in making eligible termination payments under subsection 152-325(1) of ITAA 1997, must make payments to the maximum extent possible from each instalment as it is received until the total of the eligible termination payments made equals the capital gain that is to be disregarded.
Facts
The taxpayer sold a business which was acquired after 20 September 1985. A capital gain of $200 000 arose on the sale of a CGT asset of the business. Capital proceeds from the sale of the CGT asset will be paid in five equal instalments of $100 000 over a number of years.
On the sale of the business a CGT concession stakeholder of the taxpayer ceased to be an employee of the taxpayer. The taxpayer meets the basic conditions contained in Subdivision 152-A of ITAA 1997 for small business relief. The CGT exempt amount is $200 000.
Reasons for Decision
A company can choose to disregard all or part of a capital gain under the small business retirement exemption if, amongst other things, the conditions set out in section 152-325 of ITAA 1997 are satisfied.
Subsection 152-325(1) of ITAA 1997 requires a company to make an eligible termination payment in relation to a CGT concession stakeholder each time it receives an amount of capital proceeds from a CGT event for which it has chosen the retirement exemption.
Subsection 152-325(5) of ITAA 1997 requires the amount of the eligible termination payment required to be paid under subsection 152-325(1) of ITAA 1997 to be equal to the amount of the instalment where the instalment is less than or equal to the capital gain that is to be disregarded. Eligible termination payments must be made in this manner until the total of the eligible termination payments made equals the amount of the capital gain to be disregarded.
In this situation the capital gain to be disregarded is $200 000 with each instalment of capital proceeds being $100 000. The taxpayer will be required to make two eligible termination payments of $100 000. The full amount of the first two instalments must be paid as eligible termination payments. Each eligible termination payment must be made 7 days after the taxpayer makes the choice or 7 days after it receives that instalment, whichever is the later (subsection 152-325(3) of ITAA 1997).