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Ruling

Subject: Capital gains tax small business concessions

Question

Will the Commissioner exercise his discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend your time limit to access the capital gains tax (CGT) small business concessions on the disposal of the shares (the active assets) in related company A?

Answers:

No

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2010

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· your application for private ruling

· copy of the will of the deceased

· copy of Memorandum of Wishes of the deceased

The deceased died in 2010.

Probate was granted some 8 months later.

The documents relevant to the Estate are the Will and Memorandum of Wishes to the Executors.

As the deceased did not directly own the land which they wanted to transfer on their death to their spouse and children in various proportions, it was necessary to give control to the Executors as to how and when the portions of land were to be transferred.

The most significant asset of the Estate is the shares held in related company A. The aggregate turnover of business income of the Estate and related entities is less than $2 million. Therefore, you state that the small business capital gains tax concessions should apply to the Estate.

Through the deceased's business structure the deceased controlled land and conducted a business activity on the land. The deceased was also involved in another business activity.

The business structure entails:

· Company A - holds 9,999 of the 10,000 shares in related Company B. The shares are more than 80% of the market value of all the assets of related Company A. You advise that the shares are active assets as it is considered that 80% or more of the market value of all the assets of related Company B are active assets. Company A consists of 10,000 shares of which, the deceased owns 5,000 pre-CGT shares and 4,999 post-CGT shares.

· Company B - owns land and leased to a related entity C which used the land for business purposes and did not rent the land to a third party. The company holds a 75% interest in related entity C.

· Related entity C operated the business. The business has incurred losses over many years.

· Related entity D - holds a 25% interest in related entity C.

· Company C - acts as trustee of related entity D.

You state that various issues have affected the administration and realisation of the assets of the Estate so additional time is required to dispose of the shares in Company A. The issues include:

· The Will with the interaction with the Memorandum of Wishes has made the administration of the Will complex, especially with regards to dealing with the land

· The deceased's spouse took over the full operation of the businesses.

· The business had been making a loss for many years and this added financial pressure. Some of the bank facilities were also required to be negotiated.

· The deceased's spouse and children are independent of each other. Accordingly, the Will is taking extra time to ensure items are dealt with amicably for all parties.

· The income tax and capital gains tax implications of the Will required assessment.

· The tax review raised as an option the possibility of transferring the land out of the Company B to the beneficiaries now rather than waiting for the spouse to cease operating the business.

· The tax consequences of transferring the land were complex and required detailed and time consuming investigation including the assessment of state stamp duty.

· The possible options, implications and financing have had to be considered by the various beneficiaries and this has also been time consuming.

· The transfer of the land will require the liquidation of two companies, both Company A and B, so that there are no loans to associates that may be subject to Division 7A.

· The liquidation process normally takes six to nine months to complete, but with two liquidations and other entities to wind up, it is anticipated that the liquidations will take extra time to complete.

You advise that although the will has not been contested, there has been difficulty in reaching agreement between parties, due to:

· the executors not being family members

· the family members live in different areas

· the children who are beneficiaries of the Estate are independent of the deceased's spouse

You advise that the liquidation of the two companies has not yet commenced.

You advise that, due to the above matters it is unlikely that the issues will be resolved by the two year period from date of deceased's death).

The beneficiaries are seriously considering transferring the land now. After some consideration all parties wish to retain ownership of the land in the family. They want to unwind the complex structure now so that the future division of the land will be simplified.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-80

Income Tax Assessment Act 1997 Subsection 152-80(3)

Reasons for decision

Summary

The Commissioner will not exercise his discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend your time limit to access the capital gains tax (CGT) small business concessions in relation to the disposal of the shares.

This is because, based on the information provided, the delay in disposing of the shares in Company A was not entirely caused by factors beyond your control and the process of liquidation of the companies to effect the disposal of the shares has not yet commenced.

Detailed reasoning

Death and the small business CGT concessions

Section 152-80 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the legal personal representative (LPR) or beneficiary of the deceased estate will be eligible for the small business CGT concessions where:

· the asset is disposed of within two years of the date of death (although the Commissioner may allow a longer period by granting an extension of time), 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.

Provided these conditions are satisfied, the CGT small business concessions are also available to the trustee of a trust established by the will of the deceased, a beneficiary of such a trust and a surviving joint tenant.

Commissioner's discretion

The Commissioner may exercise his discretion to allow an extension of time under subsection 152-80(3) of the ITAA 1997 in situations such as where:

· the will is contested or challenged;

· the complexity of a deceased estate delays the completion of administration of the estate;

· a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury); or

· settlement of a contract of sale is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control.

In exercising his discretion, the Commissioner would also consider the following factors:

· there should be evidence of an acceptable explanation for the delay, and that it would be fair and equitable in the circumstances to provide such an extension;

· account must be had to any prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension;

· account must be had of any unsettling of people, other than the Commissioner, or of established practices;

· there must be a consideration of fairness between the taxpayer and other people in like positions and the wider public interest;

· whether there was any mischief involved; and

· a consideration of the consequences.

In your case, you state that the Estate has yet to be fully administered due to the complexity of the Will and its interaction with the Memorandum of Wishes, especially with regards to dealing with the land held by the related company.

You provide that the various beneficiaries, after some consideration, have decided to retain the land held by the related company. They wish to unwind the complex structure of the ownership of the land to simplify the future division of the land and this will require the liquidation of two companies. However, you state that the liquidation of the companies that is required to effect this decision has not yet commenced.

Having considered the relevant factors against your circumstances, in particular the fact that:

· the will was not contested, and

· the liquidation process has not yet commenced despite more than 15 months passing since probate was granted, and

· the delay in disposing of the active assets (the shares) was not entirely caused by factors outside of the relevant parties control

the Commissioner will not exercise the discretion under subsection 152-80(3) of the ITAA 1997 to allow an extension to your time limit to access the CGT small business concessions.

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