CGT small business relief: maximum net asset value test - 'just before' the time of the CGT event

Does the reference to 'just before the CGT event' in section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997) refer to just before the time of the CGT event or just before the CGT event happens?

The reference to 'just before the CGT event' in section 152-15 of the ITAA 1997 refers to just before the time of the CGT event, that is, the time listed in column 2 of the table in section 104-5 of the ITAA 1997 for each CGT event.

The taxpayer has carried on a farming business for many years. The taxpayer decides to sell the land and enters into a contract for sale on 31 March 2003. Settlement is due to take place 6 months later on 30 September 2003.

A basic condition for small business relief in Division 152 of the ITAA 1997 is the maximum net asset value test in section 152-15 of the ITAA 1997. Under this test the net value of the CGT assets of the taxpayer and certain related entities must not exceed $5 million 'just before' the CGT event.

Under section 104-10 of the ITAA 1997, CGT event A1 happens if a taxpayer disposes of a CGT asset, that is, there is a change of ownership of the CGT asset from one entity to another.

A change in the ownership of land generally occurs at completion (that is, settlement) of the contract under which the land is sold (Taxation Ruling TR 94/29). So the CGT event happens upon settlement. However, under paragraph 104-10(3)(a) of the ITAA 1997 the time of the CGT event is taken to be the time of entering into the contract for the disposal.

It is considered the reference to 'just before the CGT event' in section 152-15 of the ITAA 1997 refers to just before the time of the CGT event, that is, just before the time of entering into the contract for the disposal of the land. It is at this point the maximum net asset value test must be satisfied.

Therefore, the taxpayer must satisfy the maximum net asset value test just before the sale contract was entered into on 31 March 2003. Note: For CGT events happening in the 2007/08 and later income years, section 152-15 of the ITAA 1997 has been amended by the Tax Laws Amendment (Small Business) Act 2007 to increase the maximum net asset value test to $6 million.