Issue
Does the term 'liabilities' in the calculation of 'the net value of the CGT assets' of an entity in subsection 152-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997) include contingent liabilities?
Decision
No. The term 'liabilities' in the calculation of 'the net value of the CGT assets' of an entity in subsection 152-20(1) of the ITAA 1997 does not include contingent liabilities.
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, provisions for employee leave entitlements and provisions for income tax were recorded as liabilities in the company's accounts.
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).
The term 'liabilities' as used in subsection 152-20(1) of the ITAA 1997 to determine the net value of the CGT assets of an entity, has its legal meaning. It extends to a legally enforceable debt which is due for payment and to a presently existing obligation to pay either a sum certain or an ascertainable sum. It does not extend to contingent liabilities, future obligations or expectancies.
Amounts that are within the accounting meaning of the term 'liabilities' but not within its legal meaning, are therefore not within the scope of the term as used in subsection 152-20(1) of the ITAA 1997.
Examples of amounts that are accordingly not included in the net asset calculation include the following: • provisions for long service and annual leave entitlements; • provisions for income and other taxes; and • accounting liabilities arising as a result of receiving prepaid income.
Accordingly, the company cannot take into account such amounts in determining the net value of its CGT assets under subsection 152-20(1) of the ITAA 1997.