CGT - Contingent and unascertainable amounts and the small business concessions

Can the small business relief provisions of Division 152 of the Income Tax Assessment Act (ITAA 1997) apply to a contingent and unascertainable amount which, depending on the performance of the business sold, is payable in the future?

No. The small business relief provisions of Division 152 of the ITAA 1997 cannot apply to the amount payable in the future as the amount will not relate to the disposal of an active asset within the meaning of section 152-40 of the ITAA 1997.

The taxpayer was a company. The taxpayer's business assets, including goodwill, were sold to an unrelated entity pursuant to a Deed of Sale and Purchase agreement.

The Deed provided for the immediate payment of an agreed monetary amount and for a further contingent and unascertainable sum payable in accordance with a formula based on the future performance of the business.

Capital proceeds are defined in subsection 116-20(1) of the ITAA 1997 to be money received or receivable plus the market value of any property received in relation to the CGT event.

At the time the taxpayer's business was sold it received cash and property in the form of a contingent right to a future payment. This right is a separate CGT asset acquired by the taxpayer at the time when its business assets were sold. Note paragraph 17 of Taxation Ruling TR 93/15: '17. The seller has received a lump sum and a right to be paid a further amount of money on an event occurring. The right is a contractual promise that has been obtained for value and is capable of being assigned. It is a right of a proprietary nature. The seller receives or becomes entitled to receive that right at the time of the disposal of the asset. Accordingly, the seller has received both an amount of money and property other than money (paragraph 160ZD(1(c); Marren v Ingles[1980] 3 All ER 95).'

At the future point in time, when a payment is received in relation to the right, CGT event C2 under section 104-25 of the ITAA will occur. Payments received by the taxpayer based on the performance of the business represent the proceeds for the disposal, or at least part disposal of the right and should not be confused with the capital proceeds for the sale of the business goodwill (and other business assets).

When CGT event C2 occurs the right will not have been used or be held ready for use in the course of carrying on a business, or connected with a business being carried on by the taxpayer. Therefore, the right, while being part of the capital proceeds for the disposal of the taxpayer's business assets will not, at the time of the CGT event C2, be an active asset itself, within the meaning of section 152-40 of the ITAA.

Consequently, the taxpayer will fail to satisfy the basic conditions for small business relief within section 152-10 of the ITAA 1997 and the concession contained in Division 152 of the ITAA 1997 cannot apply. Note; TR 93/15 was withdrawn when Draft Taxation Ruling TR 2007/D10 was issued.