Edited version of your written advice

Authorisation Number: 1051336087407

Date of advice: 9 February 2018

Ruling

Subject: Capital gains tax – deceased estate – small business CGT concessions – extension of time - 2 year period

Question 1

Will the Commissioner exercise his discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the two year period to dispose of Property 1?

Answer

Yes.

Question 2

Will the Commissioner exercise his discretion under subsection 152-80(30) of the ITAA 1997 to extend the two year period to dispose of Property 2?

Answer

No.

This ruling applies for the following periods

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on

1 July 20XX.

Relevant facts and circumstances

The Deceased was born prior to 20 September 1985.

The Deceased acquired their joint tenant interests in Property 1 after 20 September 1985 as follows:

● XX% original interest when Property 1 was purchased:

● XX% interest a number of years after the original interest was acquired; and.

● XX% interest when the Deceased’s partner passed away a number of years later.

● The Deceased acquired a 100% ownership interest in Property 2 when their partner passed away.

After a number of years the Deceased) passed away. At the time the Deceased passed away they were residing in a nursing home.

The Deceased’s will named the Deceased’s children as the trustees and executors (collectively referred to as the Trustees) of their estate as follows:

● Person A, who resides in a different state to where Property 1 and Property 2 (the properties) are located;

● Person B, who resided in the same state where the properties are located; and

● Person C, who also resided in the same state where the properties are located.

Under the Deceased’s will, their assets and any associated income was to be shared equally between all of their children who survived them (the beneficiaries).

A number of months after the Deceased passed away, the Trustees signed the Executor’s Oath when Person A was visiting the state the properties are located.

During the same month Person C expressed an interest in acquiring Property 1 and negotiations for their purchase of Property 1 commenced. Information was sourced from a licenced valuer who was preparing the valuations for probate purposes. Offers for the purchase of Property 1 were submitted, but were rejected due to a disagreement about the value of Property 1.

After a number of months Person C signed the Affidavit of Assets with Person B signing the Affidavit of Assets during the following month. The Affidavit of Assets was then sent to Person A for them to sign.

A number of months later, Person A swore an affidavit before Justice of the Peace (JP) Person D in relation to the Affidavit of Assets.

After a period of months, the probate application was lodged with the Probate Registry by the legal firm engaged by the Trustees which included a Statement of Assets and Liabilities that outlined the value of the properties as follows:

● Property 1 - $XXX,XXX; and

● Property 2 - $XXX,XXX.

The Probate Registry faxed a memorandum to the legal firm a number of months after the probate application had been lodged in which they requested additional information and documentation so that probate could be granted.

During the following month, the information and documentation requested by the Probate Registry was provided by the legal firm.

Probate was granted during the following month.

An updated valuation was obtained from the licenced valuer during the month after probate was granted.

In the following year the negotiations for the purchase of Property 1 by Person C were discontinued and around the middle of the year Property 1 was put on the market.

Negotiations for the purchase of Property 2 by the beneficiaries commenced in the month after Property 1 had been put on the market.

During the same month, a contract for the sale of Property 1 was entered into for the sale price of $XXX,XXX.

Offers were made in relation to the purchase of Property 2; however there was no agreement between the beneficiaries and Trustees about the fair value of Property 2. As a result the negotiations were discontinued and Property 2 was put on the market over 12 months after the negotiations had started.

A contract for the sale of Property 1 was entered into a number of months after it had been put on the market for the sale price of $XXX,XXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 128-50

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Section 152-80

Reasons for decision

Commissioner’s discretion to extend the two year period for a capital gains tax event to occur after an individual’s death

When a taxpayer acquires a capital gains tax (CGT) asset, including acquisition by inheritance, they are potentially liable for tax on any capital gain on that asset when a CGT event subsequently happens to it. If a CGT asset is owned by joint tenants and one of them dies, the survivor is taken to have acquired the deceased individual's interest in the asset on the day they died under subsection 128-50(2) of the ITAA 1997.

In some instances, a taxpayer can reduce the capital gain made from a CGT event by applying the small business CGT concessions. Section 152-80 of the ITAA 1997 potentially extends the availability of the small business CGT concessions to an asset held by a legal personal representative or beneficiary of a deceased estate, to the extent that the deceased would have been entitled to the concessions, if a CGT event happens to the asset within two years of the death

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 two years of the deceased’s death unless the Commissioner extends the time period in accordance with subsection 152-80(3) of the ITAA 1997.

● In determining whether the discretion to allow further time under subsection 152-80(3) of the ITAA 1997 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.

Subsection 104-10(3) of the ITAA 1997 identifies that for disposal of assets (being capital gains tax event A1), the time of the capital gains tax event is when the disposal contract is signed.

Application to your situation

You have requested the Commissioner exercise his discretion to extend the two year period to dispose of Property 1 and Property 2. We have considered whether that discretion will be exercised as follows:

Property 1

The Deceased passed away on after 20 September 1985 and the application for probate was not lodged until more than 12 months after they had passed away.

Additional information and documentation was requested by the Probate Registry which was provided to them on a number of months after the probate application had been lodged. Probate was granted more than a year after the Deceased had passed away, but still within the two year period.

It is viewed that the delay in obtaining probate, and ultimately the sale of Property 1, was due to the actions of the Trustees in relation to the time it took them to provide all of the relevant information and documentation to the Probate Registry, and Person A’s choice not to execute the Statement of Assets and Liabilities until they were satisfied with the values even though estimated values would have been sufficient to obtain probate.

Further delays had occurred due Person C expressing their interest in purchasing Property 1 prior to probate being granted. They submitted offers which were rejected by the Trustees who disagreed about the value of Property 1 and an updated valuation was obtained from the licenced valuer after probate had been granted. However, negotiations for the purchase of Property 1 by Person C had not ceased until more than two years after the Deceased had passed away.

In this case, once probate had been granted there was nothing legally to prevent the sale of Property 1 and at the time probate was granted there were still around a number of months remaining of the two year period. The delay in selling Property 1 had been caused by the choice the Trustees had made not to put Property 1 on the market, but to consider Person C’s desire and offers to purchase Property 1.

Property 1 was put on the market after the negotiations with Person C had ceased. A contract of sale was entered in the month after the property was put on the market, being less than 12 months after probate was granted and a number of months after the two year period had passed.

We have considered the factors of your situation and the application of subsection 152-80(3) of the ITAA 1997 and have determined that the Commissioner will exercise his discretion to extend the two year period in relation to Property 1 given that the sale of the property occurred a reasonably short period after probate was granted, and the two year period was lapsed by a relatively short period. Therefore, the two year period will be extended until the date the contract of sale for Property 1 was entered into.

Property 2

Property 2 was put on the market more than four years after the Deceased had passed away, with a contract of sale being entered into a number of months later.

The delays caused by the actions and choices of the Trustees in relation obtaining probate as outlined above for Property 1 also apply in relation to Property 2. Additionally, negotiations for the purchase of Property 2 by the beneficiaries had not commenced until after Property 1 had been put on the market, almost a year after probate was granted.

The following statements have been made in the ruling:

● the negotiations in relation to Property 2 had not commenced at an earlier date as the interest expressed by the beneficiaries was dependant on the treatment of Property 1 and it was not until Property 1 was listed for sale that negotiations regarding Property 2 could commence without reservation. Offers made by the parties had not been accepted by the other parties due to them not agreeing on a fair sale price.

It was the Trustees’ choice not to accept any offers made by each other. Additionally, it was their choice not to turn their minds to selling Property 2 until Property 1 was put on the market. Nothing has been provided to support that there was any legal impediment to prevent the Trustees from putting Property 2 on the market at an earlier date.

● given that there were multiple property titles involved, it was necessary for the Trustees to consider whether the value of the properties could be maximised via a sale of the properties either individually or together.

The Commissioner’s discretion to extend the two year period is not exercised in circumstances where the sale of the relevant property/ies has been delayed for the purpose of maximising profits on their sale; and

● the property is farmland which generally takes longer to sell than other forms of real property. Regardless of whether this statement is correct, in this case neither property was put on the market for months after probate was granted. The contract of sale for Property 1 was entered into the month after it was put on the market. This would be considered a reasonably short period of time for any type of property to be sold.

● Property 2 had taken around a few months to sell after it was put on the market. Given that Property 2 was not put on the market until a number of years after the two years had passed after the Deceased passed away it cannot be viewed that the nature of Property 2 was a factor that had prevented it from being sold at an earlier date.

It is viewed that the period it took the Trustees to sell Property 2 following the date the Deceased passed away was a considerable period of time and an extension would only be considered if there were exceptional circumstances.

Having considered the information and documentation provided, and taking into consideration the purpose of subsection 152-80(3) of the ITAA 1997, the Commissioner will not exercise his discretion to exercise his discretion to extend the two year period to sell Property 2 until the date the contract of sale was entered into.

Further issues for you to consider

This ruling has not fully considered your eligibility for the small business capital gains tax concessions. You should ensure that you satisfy the relevant conditions for the concessions and the additional conditions for shares held in a company. More information is available in the Guide to capital gains for small business 2014-15 which can be viewed via the following link:

https://www.ato.gov.au/general/capital-gains-tax/small-business-cgt-concessions/small-business-concessions-in-prior-years/

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