Edited version of your written advice

Authorisation Number: 1051331596427

Date of advice: 7 February 2018

Ruling

Subject: Commissioner’s discretion under section 152-80 of the Income Tax Assessment Act 1997

[Question

Will the Commissioner exercise the discretion under section 152-80 of the Income Tax Assessment Act 1997 (ITAA 1997) and extend the two year time period in respect to the disposal of the farming properties?

Answer

Yes

This ruling applies for the following period(s):

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commences on:

I July 2017

Relevant facts and circumstances

L and M owned farming properties (farming properties) as joint tenants.

L and M also own a residential unit (the unit).

L and M have used the farming properties since purchasing them for the purposes of primary production.

L and M leased the farming properties to their family trust (family trust) on a share farming arrangement and in return received annual lease payments from the family trust.

L and M’s share farming business was through a partnership between G and P.

Both L and M had an active involvement in the day to day operation of the share framing business, including operating the farming properties as a primary producer, making business decisions and strategically planning.

The family trust carried on primary production activities including running livestock and various cropping on the farming properties.

L passed away unexpectedly (the deceased).

The deceased had provided significant expertise and labour to the operations carried out on the farming properties.

The deceased was trustee of the family trust until the deceased’s passed away.

Following the deceased’s passing, M (you) became trustee of the family trust by deed of appointment.

You have continued to operate the share farming business as a partnership between L’s estate and yourself and treated the farming properties as an active asset since the deceased’s passing.

Share farming payments have continued to be made by the family trust to the share farming partnership.

The family trust is the legal owner of all of the livestock, crops and other primary production output.

Your children assist in operating the farming properties.

The deceased’s 50% ownership interest in the farming properties will devolve to you as the remaining joint tenant.

You intend to distribute the farming properties and unit to your children. You are currently entering into an agreement with your children to transfer the following farming properties. The transferred farming properties will continue to be leased back to the family trust.

You will register mortgages over the farming properties when you transfer them to your children.

You will transfer your unit to your child without any mortgage.

In the future you will purchase land and build a house for your retirement.

You are not seeking the application of the Commissioners discretion under section 152-80 of the ITAA 1997 in respect to:

● The deceased’s 50% interest in farming property known as V which is a CGT asset acquired prior to 20 September 1985; and

● The unit, as it is not an active asset.

You have stated that the family trust is a small business entity for the purposes of section 152-10 of the Income Tax Assessment Act 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-80.

Reasons for decision

Summary

The Commissioner will exercise discretion under section 152-80 of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time for the disposal of the farming properties.

Detailed reasoning

Section 152-80 of the ITAA 1997 allows the legal personal representative (LPR) of the deceased to apply the small business capital gains tax (CGT) concessions if the conditions set out in subsection 152-80(1) of the ITAA 1997 are satisfied. These conditions include:

● the asset forms part of the estate

● the asset devolves to the individual’s LPR, beneficiary or joint tenant

● the deceased would have been entitled to reduce or disregard a capital gain under Division 152 of the ITAA 1997 if a CGT event had happened in relation to the CGT asset immediately before his or her death, and

● a CGT event happens in relation to the CGT asset within two years of the individual’s death.

The two year time limit prescribed may be extended by the Commissioner in certain circumstances.

In determining whether a longer period will be allowed, the Commissioner will consider a range of factors such as:

● whether there is evidence of an acceptable explanation for the period of extension requested and whether it would be fair and equitable in the circumstances to provide such an extension;

● whether there is any prejudice to the Commissioner if the additional time is allowed, however the mere absence of prejudice is not enough to justify the granting of an extension;

● whether there is any unsettling of people, other than the Commissioner, or of established practices;

● fairness to people in like positions and the wider public interest;

● whether there is any mischief involved; and

● the consequences of the decision.

Small business concessions under Division 152 of the ITAA 1997

The LPR of the deceased’s estate is able to apply the small business CGT concessions that would have been available to the deceased immediately before his death if a CGT event happens in relation to the CGT asset, if the conditions in subsection 152-10(1) of the ITAA 1997 are satisfied:

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

(b) the event would otherwise have resulted in a capital gain;

(c) one or more of the following applies;

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

(ii) the taxpayer is a "small business entity" for the income year; or

(iii) the asset is an interest in an asset of a partnership which is a small business entity for

the income 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 income year; and

(d) the asset satisfies the active asset test.

Passively held assets

Section 152-10(1A) of the ITAA 1997 relating to passively held assets allows you to access the concessions for a CGT asset you own where you are not carrying on a business, but that CGT asset is used in the business of your affiliate or a small business entity connected with you.

A Small business entity (SBE) is defined in subsection 328-110(1) of the ITAA 1997:

You are a small business entity for an income year (the current year) if:

(a) you carry on a *business in the current year; and

(b) one or both of the following applies:

(i) you carried on a business in the income year (the previous year) before the current year and your *aggregated turnover for the previous year was less than $2 million;

(ii) your aggregated turnover for the current year is likely to be less than $2 million.

Special rules apply in calculating the aggregated turnover of the small business entity. The annual turnover includes the small business entity’s turnover, any connected entity’s turnover and any affiliates annual turnover.

Active asset test

The active asset test is satisfied if:

● 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 test period detailed below, or

● you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of least 7.5 years during the test period.

The test period:

● begins when you acquired the asset, and

● ends at the earlier of

● the CGT event, and

● when the business ceased, if the business in question ceased in the 12 months before the CGT event (under subparagraph 152-35(2)(b)(ii) of the ITAA 1997 the Commissioner can allow a longer period than 12 months).

A CGT asset is an active asset if it is owned by you 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.

An entity is connected with another entity if:

(a) either entity controls the other entity in a way described in this section; or

(b) both entities are controlled in a way described in this section by the same third entity.

Disposal of asset after two year time limit

If a person carrying on a business dies and their assets devolve to their LPR, beneficiary, surviving joint tenant or trustee or beneficiary of a testamentary trust (the transferee), the active asset test is applied to the transferee 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).

Application to your circumstances

You and the deceased acquired the farming properties and used them for primary production as part of the share farming business that you operated through a partnership between you and the deceased.

The deceased held a 50% ownership interest in the farming properties and following the deceased’s passing, the deceased’s 50% interest devolved to you as a joint tenant.

The deceased would have qualified for the small business concessions, if the farming properties had been disposed of immediately before the deceased’s passing or if a CGT event happened within two years of the deceased’s passing.

The deceased satisfied the basic conditions for the small business concessions as the farming properties were passively held assets used in the business carried on by the family trust which is a small business entity connected with the deceased.

As the transferee, you treated the farming properties as an active asset and continued to carry on the primary production business.

The CGT event (disposal of the deceased’s 50% interest in the farming properties) will occur two years after the passing of the deceased due to the following reasons:

● The deceased passed away unexpectedly and provided significant expertise and labour to the operations carried out on the farming properties prior to the deceased’s passing.

● Due to your personal circumstances you have decided to transfer the deceased’s 50% ownership interest in the family properties that devolved to you at the deceased’s time of passing along with your 50% interest in the farming properties to your adult children, so the farming properties can remain in the family. This has required significant planning in establishing trusts in your children’s name and to set up other structures to minimise potential risk to the farming properties.

● You wish to take advantage of the retirement concession limit of $500,000 that would have been available to the deceased prior to his passing to off- set any capital gain liability that may attach to the deceased’s 50% interest in the farming property that was acquired prior to 20 September 1985 and you and the deceased’s ownership interest in another farming property which has been held for less than 15 Years.

Having considered the circumstances and the factors outlined above, the Commissioner is able to apply his discretion under section 152-80 of the ITAA 1997 and allow an extension of time until 30 June 2019.

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