ATO Interpretative Decision

ATO ID 2002/269

Income Tax

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Issue

If the capital proceeds from the disposal of a CGT asset are less than the market value of the asset, how much of the capital proceeds can the taxpayer choose as the asset's CGT exempt amount for the purposes of section 152-315 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

If the capital proceeds from the disposal of a CGT asset are less than the market value of the asset, the taxpayer can choose up to the amount of actual capital proceeds received (to the extent of the remaining capital gain) as the asset's CGT exempt amount for the purposes of section 152-315 of the ITAA 1997.

Facts

The taxpayer is over 55 years of age.

In order to retire the taxpayer intends selling a CGT asset to the taxpayer's child and the child's spouse.

The taxpayer proposes that the sale price will be less than market value; the parties will not be dealing with each other at arm's length in connection with the transaction.

The requirements for the CGT discount are satisfied.

The basic conditions for the small business CGT concessions are satisfied.

Reasons for Decision

As the proceeds from the disposal of the CGT asset to the taxpayer's child and the child's spouse will be less than the market value of the asset, the capital proceeds from the disposal will need to be modified to reflect this. Subsection 116-30(2) of the ITAA 1997 provides that the capital proceeds from the disposal are replaced with the market value of the CGT asset if the capital proceeds are less than the market value of the asset, and the vendor and the purchaser did not deal with each other at arm's length in connection with the disposal.

As a result the capital gain arising from the disposal will be calculated by replacing the actual proceeds received with the market value of the asset at the time of the disposal.

As the date of the disposal of the asset falls after 20 September 1999 (and the other requirements are satisfied), the capital gain that results from this calculation can be reduced by the CGT discount of 50% (Division 115 of the ITAA 1997). As the taxpayer satisfies the basic conditions for small business relief under Division 152 of the ITAA 1997, the capital gain can then be reduced further by applying the small business 50% reduction (Subdivision 152-C of the ITAA 1997). The taxpayer may choose not to apply this reduction (section 152-220 of the ITAA 1997).

The taxpayer may choose to disregard all or part of the capital gain remaining by applying the small business retirement exemption (Subdivision 152-D of ITAA 1997). If an amount is chosen to be disregarded the capital proceeds from the disposal, to the extent of the amount chosen (referred to as the CGT exempt amount), is taken to be an eligible termination payment paid to the taxpayer under subsection 152-310(2) of the ITAA 1997.

However, in working out the capital proceeds that can be taken to be an eligible termination payment paid to the taxpayer, the market value substitution rule set out in subsection 116-30(2) of the ITAA 1997 is disregarded (subsection 152-310(3) of the ITAA 1997). Consequently, the taxpayer can choose up to the amount of the actual capital proceeds received (to the extent of the remaining capital gain) as the asset's CGT exempt amount for the purposes of section 152-315 of the ITAA 1997.

If the capital proceeds received are less than the amount of capital gain remaining after the reduction or reductions are made, the taxpayer will only be able to choose up to the amount of the actual capital proceeds received as the CGT exempt amount. The taxpayer will make a capital gain equal to the amount the taxpayer is not able to choose to disregard.

If the capital proceeds received are more than the amount of capital gain remaining after the reduction or reductions are made, the taxpayer will be able to choose up to the amount of capital gain remaining as the CGT exempt amount.

Year of income:  Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   Division 115
   Subsection 116-30(2)
   Division 152
   Subdivision 152-C
   Subdivision 152-D
   Section 152-220
   Subsection 152-310(2)
   Subsection 152-310(3)
   Section 152-315

Keywords
Capital gains tax
Capital gains
Small business retirement exemption
CGT capital proceeds
CGT capital proceeds modification market value substitution rule

Business Line:  Centres of Expertise Capital Gains Tax

Date of publication:  22 March 2002

ISSN: 1445-2782