Issue
Do the words 'liabilities of the entity that are related to the assets' in the calculation of the net value of the CGT assets of an entity under subsection 152-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997), require each liability to be directly related to a particular asset?
Decision
No. The words 'liabilities of the entity that are related to the assets' in the calculation of the net value of the CGT assets of an entity under subsection 152-20(1) of the ITAA 1997, do not require each liability to be directly related to a particular asset. The liabilities may relate to the assets of the entity more generally.
Facts
The taxpayer company carries on business. Two individuals each own 50% of the shares in the company.
The company sold a business asset on 31 October 2003 and is considering the possible application of the small business capital gains tax (CGT) concessions in Division 152 of the ITAA 1997. In order to qualify for these concessions, the company must, among other things, determine if it satisfies the $5 million maximum net asset value test. In considering that test, the taxpayer must determine the net value of its CGT assets and that of certain related entities.
Just before the company sold the asset, the company's liabilities included a bank overdraft used in the operation of the business and an income tax liability arising from an income tax assessment that issued on 20 October 2003.
Reasons for Decision
One of the basic conditions that must be satisfied to qualify for the small business CGT concessions is the $5 million maximum net asset value test in section 152-15 of the ITAA 1997. Broadly, the net value of the CGT assets of the taxpayer and certain related entities must not exceed $5 million just before the relevant CGT event.
The 'net value of the CGT assets' of an entity is the amount (if any) by which the sum of the market values of those assets exceeds the sum of the liabilities of the entity that are related to the assets (subsection 152-20(1) of the ITAA 1997).
Liabilities that may be taken into account include liabilities that are directly related to particular assets that are themselves included in the calculation, for example, a loan to finance the purchase of business premises. On the other hand, a liability that is directly related to an asset that is not included in the calculation cannot be taken into account. For example, a loan to acquire an asset used solely for personal use and enjoyment will not be included because the asset itself will not be included in the test.
The words 'liabilities of the entity that are related to the assets' also include liabilities that are not directly related to only one particular asset, but which relate to the assets of the entity more generally - for example, a bank overdraft or other short term financing facilities that provide working capital for the operation of the business. Incurred tax liabilities (but not contingent tax liabilities, provisions for tax or the like) of an entity carrying on a business, may also reasonably be seen as being related to the assets of that entity for the purposes of determining the net value of the CGT assets of that entity.
Accordingly, the words 'liabilities of the entity that are related to the assets' do not require each liability to be directly related to a particular asset. Note: As subsection 152-20(1) of the ITAA 1997 is directed at determining the net value of the CGT assets on an entity by entity basis and refers to 'the liabilities of the entity' the liabilities of one entity can not be taken into account in determining the net value of the CGT assets of another entity.