ATO ID 2003/745: CGT small business relief: maximum net asset value test - 'just before' the CGT event - immediately before
Date of decision: 26 June 2003
Year of income: Year ended 30 June 2003
Business line: Public Groups and International

Issue
If the net value of the CGT assets of the taxpayer (and other relevant entities) increased from less than $5 million to more than $5 million on the same day as, but prior to, a CGT event happening, does the taxpayer satisfy the maximum net asset value test in section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. The taxpayer does not satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 because 'just before' the CGT event the net value of the CGT assets of the taxpayer (and other relevant entities) exceeded $5 million.

Facts
The taxpayer is a sole trader. The net value of the CGT assets of the taxpayer (and other relevant entities) was $4,995,000 on the morning of the sale of an active asset. This included public company shares that had a market value of $1 million. By 11.59 am that day the share price had risen 0.6% so that the market value of the shares increased to $1,006,000 and the net value of the CGT assets increased to $5,001,000. Immediately after that time, the taxpayer entered into a contract to sell their business.

Reasons for decision
Summary: A basic condition for small business relief in Division 152 of the ITAA 1997 is that the maximum net asset value test in section 152-15 of the ITAA 1997 is satisfied. 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 that gave rise to the capital gain for which relief is sought. The words 'just before' in section 152-15 of the ITAA 1997 effectively mean 'immediately before'. Under subsection 152-20(1) of the ITAA 1997 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. In this case, there was an increase in the market value of some of the taxpayer's CGT assets on the same day as, but prior to, the CGT event. The net value of the taxpayer's CGT assets increased and as a result exceeded the $5 million threshold immediately before the CGT event. The taxpayer therefore does not satisfy the maximum net asset value test 'just before' the CGT event.

Legislative references: Tax Laws Amendment (Small Business) Act 2007 The Act
Subject references: Basic conditions for relief Capital gains tax CGT events CGT small business relief Maximum net asset value test