Private ruling: Capital gains tax concessions for small business
Published: May 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Do you satisfy the maximum net asset value (MNAV) test under section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? Answer: Yes

Relevant facts and circumstances: You and your spouse set up a company. You held less than 40% of the voting shares in the company. Your spouse held less than 40% of the voting shares in the company. You state that the spouses are not affiliates. You state that the spouses have no other affiliates and the only entity that is connected with them is the family trust. The net CGT assets of the family trust total $XXX You state that there are no CGT assets of yours (as individuals) that need to be considered as all of your investments are held by the family trust. You and your spouse sold your shares in the company. Your share of the sale proceeds totals $XXX. Your spouse's share of the sale proceeds totals $XXX.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-20 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Section 328-130

Reasons for decision: Detailed Reasoning - Maximum net asset value (MNAV) test: Section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997) explains that you satisfy the MNAV test if, just before the CGT event, the sum of the following amounts does not exceed $6,000,000: (a) the net value of the CGT assets of yours; (b) the net value of the CGT assets of any entities connected with you; (c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)). Importantly, the Commissioner takes the view, in ATO Interpretative Decision ATO ID 2003/166, that cash or Australian currency is a CGT asset for the purposes of the MNAV test Subsection 152-20(1) of the ITAA 1997 provides that the net value of the CGT assets of an entity is the amount (whether positive, negative or nil) obtained by subtracting from the sum of the market values of those assets the sum of: a) the liabilities of the entity that are related to the assets; and b) the following provisions made by the entity: i. provisions for annual leave; ii. provisions for long service leave; iii. provisions for unearned income; iv. provisions for tax liabilities. Subsection 152-20(2) of the ITAA 1997 provides that in working out the net value of the CGT assets of an entity: a) disregard shares, units or other interests (except debt) in another entity that is connected with the first-mentioned entity or with an affiliate of the first-mentioned entity, but include any liabilities related to any such shares, units or interests; and b) if the entity is an individual, disregard: i. assets being used solely for the personal use and enjoyment of the individual, or the individual's affiliate (except a dwelling, or an ownership interest in a dwelling, that is the individual's main residence, including any adjacent land to which the main residence exemption can extend because of section 118-120); and ii. except for an amount included under subsection (2A), the market value of a dwelling, or an ownership interest in a dwelling, that is the individual's main residence (including any relevant adjacent land); and iii. a right to, or to any part of, any allowance, annuity or capital amount payable out of a superannuation fund or an approved deposit fund; and iv. a right to, or to any part of, an asset of a superannuation fund or of an approved deposit fund; and v. a policy of insurance on the life of an individual. Subsection 152-20(3) of the ITAA 1997 states that in working out the net value of the CGT assets of: (a) your affiliate; or (b) an entity that is connected with your affiliate; include only those assets that are used, or held ready for use, in the carrying on of a business by you or another entity connected with you (whether the business is carried on alone or jointly with others). | Detailed Reasoning - Affiliate: Subsection 328-130(1) of the ITAA 1997 explains that an individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company. Whether a person acts, or could reasonably be expected to act, in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer is a question of fact dependent on all the circumstances of the particular case. No one factor will necessarily be determinative. You have stated that the spouses are not affiliates as; · you do not act in concert with each other in relation to the affairs of the business · you state that neither spouse acts according to the directions or wishes of the other | Detailed Reasoning - An entity that is connected with you: Subsection 328-125(1) of the ITAA 1997 explains that an entity is connected with another entity if: a) either entity controls the other entity in a way described in this section; or b) both entities are controlled in a way described in this section by the same third entity. Subsection 328-125(2) of the ITAA 1997 provides that an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: if the other entity is a company - beneficially owns, or has the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power in the company. | Detailed Reasoning - Application to your circumstances: You have stated that the spouses are not affiliates and that the family trust is an entity connected with them. The spouses each hold less than 40% of the voting shares in the company, and consequently they are not connected with the company. Therefore, the assets that will need to be included in the MNAV test calculation for you include; your assets and the assets of the family trust. Likewise your spouse's MNAV test calculation will include; your spouse's assets and the assets of the family trust. The spouses individual assets will not be included in each others calculation as they are not affiliates. Further, the assets of the company will not be included in either of the spouses calculation as they do not hold enough of the voting power in the company individually to be considered connected with it. Accordingly it is only the value of the spouse's shares in the company that will be included in the test. Based on the information provided, both the spouses MNAV calculation is less than $6 million. Accordingly, both spouses satisfy the MNAV test.