CGT Small business concessions: maximum net asset value test - net value of the CGT assets - lowest possible net value is zero

In determining 'the net value of the CGT assets' of an entity under subsection 152-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997) is zero the lowest possible net value?

Yes. In determining 'the net value of the CGT assets' of an entity under subsection 152-20(1) of the ITAA 1997 the lowest possible net value is zero.

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, an entity that was connected with the company had relevant liabilities the total of which exceeded the total of the market values of its assets.

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 subsection refers to an amount (if any) by which one sum exceeds another sum. That is, it is referring to an excess, if there is one. As there cannot be a negative excess, the lowest possible value of the 'net value of the CGT assets' of an entity is nil.

Accordingly, a negative net value can not be established by the company to offset against the net values of its related entities to determine if the maximum net asset value test is satisfied.