Edited version of your private ruling

Authorisation Number: 1012434335485

Ruling

Subject: Deceased estate and small business concessions

Question 1

Are the proceeds relating to the land initially acquired by the Government authority (the first CGT event) assessable in the 200X financial year?

Answer

Yes

Question 2

Are the proceeds relating to the balance of the land acquired by the Government authority (the second CGT event) assessable in the 20YY financial year?

Answer

Yes

Question 3

Will the Commissioner exercise his discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the time limit for the land described in Question 2 to be disposed of so the small business capital gains tax (CGT) concessions can be applied to the second CGT event?

Answer

Yes

Question 4

If the answer to Question 3 is yes, is the small business retirement exemption available for both CGT events to reduce the capital gain relating to the post-CGT portion of land?

Answer

Yes

Question 5

Can the full CGT retirement exemption limit of $500,000 be accessed for the first and second CGT events?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on:

1 July 2007

Relevant facts and circumstances

The deceased owned land.

The history of the ownership and use of the land is as follows:

· The deceased acquired the land described above jointly with their spouse prior to 20 September 1985.

· For a period the land was used in a business which was run in partnership by the deceased and their spouse.

· The partnership ceased their business and commenced a new business on the land.

· The deceased's spouse died. On this date, their ownership interest in the land passed to the deceased.

· The deceased continued to operate the new business on the land in partnership with their late spouse's estate. However the deceased's health deteriorated and they were unable to continue operating the business. The business ceased. The partnership was a small business entity in the financial year that this business ceased.

· During the 200X financial year, a Government authority issued a resumption notice in the Government Gazette for part of the land. The land was not described specifically in this Gazette, but was described as approximate areas within a larger lot.

· The deceased died during the 200X financial year.

· The balance of the land that would remain following the first resumption would have been of no practical use or value. The estate entered into negotiations with the Government authority that they acquire the balance of the land.

· The Government authority issued an amended resumption notice in the Government Gazette during the 20ZZ financial year that amended the notice issued During the 200X financial year to more accurately describe the land taken. This notice included lot and plan numbers.

· During the 20ZZ financial year the Government authority paid an advance payment against compensation relating to the compulsory acquisition of $X. At this point, it was not known what the final compensation payment would be.

· During the 20YY financial year, the Government authority issued an additional resumption notice in the Government Gazette for the remaining land.

· The Government authority paid the balance of the compensation payment during the 20VV financial year, in the amount of $X. The payment was in relation to the whole of the land that was acquired.

Subsequent to the cessation of the business, but prior to being notified of the compulsory acquisitions, the deceased had intended to dispose of the land. They were in the process of obtaining development approvals to ensure they could obtain the best possible sale price for the land.

Equipment used in the business had not been disposed of at the time of the deceased's death, and still remains a part of their estate.

The trustee for the estate intends to make the necessary amendments to include the capital gains in relation to the compulsory acquisitions as soon as practicable upon receipt of this ruling.

The trustee for the estate has not actioned this matter until now as the final compensation amount was not known, and additionally, the beneficiaries of the estate have been in conflict which has resulted in a court case.

Prior to their death, the deceased had never disregarded any capital gain under the small business retirement exemption.

At the time of the first resumption notice, the deceased was over 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 Subsection 104-10(6)

Income Tax Assessment Act 1997 Subsection 152-10(1)

Income Tax Assessment Act 1997 Subsection 152-10(1B)

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Subsection 152-40(1)

Income Tax Assessment Act 1997 Section 152-49

Income Tax Assessment Act 1997 Subsection 152-80(2)

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

Income Tax Assessment Act 1997 Subsection 152-315(2)

Income Tax Assessment Act 1997 Subsection 328-110(5)

Reasons for decision

Timing of CGT event

If a CGT asset is acquired from you by an entity under a power of compulsory acquisition conferred by an Australian law or a foreign law, the time of the event under subsection 104-10(6) of the ITAA 1997 is the earliest of:

· when you received compensation from the entity, or

· when the entity became the asset's owner, or

· when the entity entered it under that power, or

· when the entity took possession under that power.

In this case, a resumption notice was published in the Government Gazette during the 200X financial year for part of the land owned by the deceased. From this date, the Government authority became the owner of the portion of property described in the Gazette. An amendment to the notice in the Gazette was issued at a later date however this notice served simply to more accurately describe the land that was taken.

The date the first CGT event occurred is the earliest of the dates mentioned in subsection 104-10(6) of the ITAA 1997. This is the date the Government authority became the owner of the land.

As the first CGT event occurred in the 200X financial year, any capital gain made from the CGT event is included in the assessable income of that year.

An additional resumption notice was published in the Government Gazette during the 20YY financial year for the balance of the land. This resulted in a separate, second CGT event occurring as on this date, the Government authority became the owner of the balance of the land.

Accordingly, any capital gain made on the disposal of the balance of the land will be included in the estate's assessable income in the 20YY financial year.

Note: As the first CGT event occurred prior to the deceased's death, it will be included in the deceased's final tax return.

Small business retirement exemption

First CGT event

As discussed above, the first CGT event is taken to have occurred prior to the deceased's death. Accordingly, to apply the small business concessions, the deceased must have satisfied the relevant conditions.

Where a taxpayer is over 55 years of age, the only requirements to apply the small business retirement exemption is that they must satisfy the basic conditions and keep a written record of the amount they choose to disregard.

The basic conditions for the small business CGT concessions are outlined in subsection 152-10(1) of the ITAA 1997:

(a) a CGT event happens in relation to an asset that the taxpayer owns

(b) the event would have, apart from the application of the small business concessions, resulted in a capital gain

(c) one or more of the following applies

(i) the taxpayer satisfies the maximum net asset value test

(ii) the taxpayer is a "small business entity" for the financial year

(iii) the asset is an interest in an asset of a partnership which is a small business entity for the financial year, and the taxpayer is a partner in that partnership, or

(iv) the special conditions for passively held assets in sub-sections 152-10(1A) or 152-10(1B) are satisfied in relation to the CGT asset in the financial year and

(d) the asset satisfies the active asset test.

Condition (a)

The first CGT event occurred when a portion of the deceased's land was compulsorily acquired.

Condition (b)

The deceased acquired a portion of the land prior to 20 September 1985 (pre-CGT). Any capital gain that relates to this portion of land is disregarded under paragraph 104-10(5)(a) of the ITAA 1997. Accordingly, the capital gain made in relation to this portion of the land will not be considered for the small business concessions.

The remaining portion of the land was acquired on the date of their spouse's death. As this portion of land is not pre-CGT, condition (b) is satisfied as the CGT event resulted in a capital gain.

Condition (c)

Subsection 152-10(1B) of the ITAA 1997 will be satisfied for a CGT asset a partner in a partnership owns (that is not their interest in a partnership asset) when the following conditions are satisfied in the financial year:

· they were a partner in a partnership in the financial year in which the CGT event happens to the partner's CGT asset

· that partnership uses the asset at a time in the financial year, in carrying on the partnership business and is a small business entity for that financial year

· the only business the partner carries on is as a partner in a partnership.

The partnership was a small business entity while it carried on the business. However, this business ceased and the land was no longer used.

If an entity is not using the asset in the business in the year the CGT event occurs because the business the entity previously carried on is winding up, section 152-49 of the ITAA 1997 may apply provided the entity used the asset in the business in the year the business ceased.

Section 152-49 of the ITAA 1997 treats the entity as carrying on the business for a moment in time in the financial year the CGT event happens and treats the asset as being used, held ready for use in, or inherently connected with, the business at that same moment in time in the CGT event year.

Additionally, there is a special provision under subsection 328-110(5) of the ITAA 1997 that allows an entity to work out whether it is a small business entity in the CGT event year when the entity is winding up a business it previously carried on. The entity will be taken to be still carrying on the business if:

· it is winding up a business it previously carried on, and

· it was a small business entity in the financial year the entity ceased business.

In this case, the business ceased trading due to the deceased's deteriorating health. It would be reasonable to expect that the winding up of the business could take some time due to the nature of the industry, paired with the ill health of the deceased.

Additionally, the deceased intended to dispose of the faming land and was in the process of obtaining development approvals for the land prior to being advised of the compulsory acquisition. Taking into consideration the timeframe involved, being that the CGT event occurred in the financial year following the cessation of the business, it would be reasonable to conclude that the business was still being wound up at the time that the first CGT event occurred.

Accordingly, subsection 328-110(5) of the ITAA 1997 will apply to treat the partnership as a small business entity in the year the first CGT event occurred. Additionally, section 152-49 of the ITAA 1997 will apply to the treat the partnership as carrying on the business for a moment in time in the financial year the CGT event happened and treat the asset as being used in the business at that same moment in time in the CGT event year.

The requirements contained in subsection 152-10(1B) of the ITAA 1997 have been met and accordingly, the condition in paragraph 152-10(1)(c) of the ITAA 1997 is satisfied.

Condition (d)

Under section 152-35 of the ITAA 1997, a CGT asset satisfies the active asset test if:

(a) you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period specified in subsection (2); or

(b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the period specified in subsection (2).

As per subsection 152-35(2) of the ITAA 1997, the period:

(a) begins when you acquired the asset; and

(b) ends at the earlier of:

(i) the CGT event; and

(ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

The term 'active asset' is defined in subsection 152-40(1) of the ITAA 1997 as an asset you own and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

In this case, the land in question was active from the date of acquisition as it was used in a business carried on in partnership by the deceased. It remained active until the business ceased. This period represents more than half of the test period. Accordingly, the active asset test is satisfied for this portion of land.

Summary

As the deceased satisfied the basic conditions, the capital gain made on the post-CGT portion of the land that was acquired by the Government authority under the first CGT event is eligible for the retirement exemption. A written record of the amount disregarded must be kept.

Second CGT event (remainder of the land)

The second CGT event occurred following the deceased's death and is accordingly assessable to the estate.

Section 152-80 of the ITAA 1997 allows either the legal personal representative of an estate or the beneficiary to apply the small business CGT concessions in respect of the sale of the deceased's asset in certain circumstances.

Specifically, the following conditions must be met:

· the asset devolves to the legal personal representative or passes to a beneficiary

· the deceased would have been able to apply the small business concessions themselves if they had disposed of the asset immediately prior to their death, and

· a CGT event happens within 2 years of the deceased's death unless the Commissioner extends the time period in accordance with subsection 152-80(3) of the ITAA 1997.

The first condition is met as the remainder of the land that was eventually acquired by the Government authority passed to the legal personal representative following the deceased's death.

As previously discussed, the basic conditions for the small business concessions were met by the deceased prior to their death (one day after the first CGT event). However this only applies to the post-CGT portion of the land. The deceased acquired a portion of the land prior to 20 September 1985. Any capital gain that related to the pre-CGT land would have been disregarded under paragraph 104-10(5)(a) of the ITAA 1997. The pre-CGT land would not have, apart from the application of the small business concessions, resulted in a capital gain and accordingly, the trustee of the estate cannot access the small business retirement exemption for the pre-CGT land.

The second CGT event did not occur within the two years following the deceased's death. Accordingly, the estate will only be able to apply the retirement exemption to the capital gain made on the post-CGT portion of the land that was acquired by the Government authority under The second CGT event if the Commissioner extends the time period in accordance with subsection 152-80(3) of the ITAA 1997.

Extension of time

In determining whether the discretion to allow further time would be exercised, the Commissioner has considered the following factors:

· evidence of an acceptable explanation for the period of the extension requested (and whether it would be fair and equitable in the circumstances to provide such an extension)

· prejudice to the Commissioner which may result from the additional time being allowed (but the mere absence of prejudice is not enough to justify the granting of an extension)

· unsettling of people, other than the Commissioner, or of established practices

· fairness to people in like positions and the wider public interest

· whether any mischief is involved, and

· consequences of the decision.

In considering whether to exercise his discretion, the Commissioner needs to be satisfied that there were circumstances beyond your control that prevented you from disposing of the assets within two years.

In this case, the estate entered into negotiations with the Government authority requesting them to acquire the remainder of the land following the resumption notice that was published in the Government Gazette for the initial resumption. The land that remained would have been of no practical use or value.

The negotiations between the estate and the Government authority were prolonged and we accept that this prevented the estate from disposing of the land within two years of the deceased's death. We do not consider that allowing an extension in this case would unsettle other people or that there is any mischief involved.

Accordingly, the Commissioner will exercise his discretion under subsection 152-80(3) of the ITAA 1997 to extend the time period. This will enable the estate to meet the conditions to apply the retirement exemption to the post-CGT portion of the land that was acquired by the Government authority under the second CGT event.

CGT retirement exemption limit

Where you disregard a capital gain under the small business retirement exemption, subsection 152-315(2) of the ITAA 1997 requires that the amount you disregard does not cause you to exceed your CGT retirement exemption limit. An individual's CGT retirement exemption limit is $500,000 less any amount that has previously been disregarded under the small business retirement exemption.

The trustee of a deceased estate is entitled to apply the small business concessions to the extent that the deceased would have been able to subject to meeting the relevant conditions(subsection 152-80(2) of the ITAA 1997).

The deceased had never previously disregarded any amount under the retirement exemption. Accordingly, the full $500,000 retirement exemption limit remains to be applied to the eligible portions of land disposed of in the first and second CGT events.

Note: If the choice is made to disregard an amount of the capital gain made from the first CGT event, the limit available to the trustee of the estate for the second CGT event will be reduced by the disregarded amount.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).