Effects of death - general rules (Division 128 of the ITAA 1997)
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When a person dies, their assets devolve (that is, are transferred) to their legal personal representative (LPR). In effect, there is a change of ownership of the assets and, therefore, a CGT event (being a disposal). However, any capital gain or capital loss from this CGT event is disregarded.
The LPR (or beneficiary of the estate) is taken to have acquired the assets on the date of death and generally the cost base of the assets is transferred to the assets in the hands of the LPR or beneficiary. (Market value is used if the deceased acquired the assets before 20 September 1985.)
In effect, with the disregarding of any capital gain upon death and the transferring of the cost base any unrealised capital gain is deferred until a later sale of the asset by the LPR or beneficiary.
The LPR or a beneficiary of the deceased's estate will be eligible for the small business CGT concessions where:
- the asset is disposed of within two years of the date of death, and
- the asset would have qualified for the small business CGT concessions if the deceased had disposed of the asset immediately before his or her death.
The Commissioner may allow a longer period by granting an extension of time.
For the retirement exemption, there is no need for the amount to be paid into a superannuation fund, even if the deceased was less than 55 years of age just before his or her death.
The 15-year exemption can also be chosen if the deceased had met the requirements, except that it is not necessary for the CGT event to have happened in relation to the retirement of the individual.
Division 128 of the Income Tax Assessment Act 1997.
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Asset disposed of by LPR after the two year time limit
If a person carrying on a business dies and their assets devolve to their LPR, the active asset test is applied to the LPR in relation to any capital gain made on a sale of the assets after the two year time limit (or such further time that the Commissioner allows). This means that if the LPR does not continue to carry on the deceased's business after the two year time limit, the active asset test will not be satisfied and none of the small business concessions will be available.
Effect of death on a previous small business rollover
If, just before dying, a person still owned a replacement or capital improved asset from an earlier small business rollover, CGT event J2 will happen upon the person's death, as the replacement or capital improved asset will stop being the deceased's active asset, having devolved to their LPR.
However, the general rules concerning death, in addition to disregarding any capital gain made on the replacement asset from CGT event A1, will also disregard the capital gain from CGT event J2. Although any capital gain from CGT event A1 is effectively deferred until a later sale of the asset by the LPR or beneficiary, the capital gain from CGT event J2 is not transferred to the LPR or beneficiary. This means that the capital gain from CGT event J2 is permanently disregarded under the general rules concerning death.
Jack disposed of an active asset and made a capital gain of $400,000. After applying the CGT discount and the active asset reduction, his remaining capital gain was $100,000. Jack acquired a replacement asset (for more than $100,000) and chose the small business rollover, disregarding the remaining capital gain of $100,000. Jack continued to carry on his business using the replacement asset until his death.
On Jack's death, the replacement asset (which had increased in value) devolved to his LPR. Accordingly, CGT event A1 and CGT event J2 happened. The capital gains from CGT event A1 and CGT event J2 are disregarded under the general rules concerning death. The capital gain on the replacement asset from CGT event A1 is effectively deferred until a later sale of the asset by the LPR or beneficiary. However, the $100,000 capital gain from CGT event J2 is not transferred to the LPR or beneficiary and accordingly remains permanently disregarded.
Last modified: 30 Jun 2009QC 27964