Liabilities reduce the maximum net asset value

March 2012

Another important decision regarding the application of the maximum net assets value (MNAV) test has been handed down by the AAT. 

The Tribunal affirmed the Commissioner's decision to make a number of adjustments in calculating the MNAV of a trust which resulted in the beneficiary taxpayer being unable to apply the small business CGT concessions.

A number of liabilities were removed from the MNAV calculation by the Commissioner and affirmed by the Tribunal. 

These included the following items:

• A loan used to fund the capital distribution from the trust could not be taken into account as a 'liability' which could reduce the trust's MNAV as there was an insufficient 
• connection with the trust's assets;
• A liability recognised in relation to a guarantee was merely a contingent liability rather than a presently existing liability so could not be used to reduce the trust's MNAV;
• The hire purchase liability should only represent the value of the obligation if the contract were to be paid out just before the CGT event rather than the total payments payable under the contract; and
• The bank account funds (i.e., savings) held by the taxpayer's spouse should be taken into account as an asset rather than being offset against an account with a debit balance relating to the mortgage on the taxpayer's residence. This is an interesting result because this means any money saved in an interest offset account would be counted as assets for the purpose of the MNAV test. This may not necessarily be the case if extra payments had been made to reduce the home loan instead.

This decision provides further guidance on what liabilities can and cannot be included when determining whether an entity can satisfy the MNAV test.

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Last updated March 2012. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.