Edited version of private advice

Authorisation Number: 1051847810172

Date of advice: 7 June 2021

Ruling

Subject: CGT and deceased estate

Question 1

Is any capital gain made on the sale of the 50% share of the land and building acquired by entity A before 1985 disregarded?

Answer

Yes.

Question 2

Is the capital gain made on the sale of the 50% share of the land and building acquired by the Deceased Estate on xxxx fully disregarded?

Answer

No.

Question 3

Does the Deceased Estate acquire the 50% share of land and building for the market value on the date of death?

Answer

Yes.

Question 4

Is the Deceased Estate entitled to the 50% discount capital gain under Division 115 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 5

Is the Deceased Estate entitled to the capital gains tax small business 50% reduction under subdivision 152-C of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

A business idea was formed several years ago as a partnership by entity B.

Before 1985, entity A and entity B purchased land in their personal names as joint tenants (50/50).

Before 1985, entity A and entity B built a building on the land.

In xxxx, the partnership dissolved and a new company, entity C was setup and incorporated. The land and building continued to be held in the personal names of entity A and entity B. Share holdings in the company were 50/50 between entity A and entity B.

Once the building was built, the business was run from the premises from xxxx. The business has continued to run since.

On xxxx entity B passed away and his shareholdings in the company were passed to the Deceased Estate. The other 50% of shares are still held by entity A.

On the date of death, entity B's 50% personal holding in the land and building passed to the Deceased Estate. Entity A retained the other 50%.

Probate was granted on xxxx.

Offers were received to buy the business, land and buildings.

The company's ACN will still be owned by entity A and entity E but they will sell the plant and equipment and other assets for $xxxx. Contract date was xxxx and completion date was xxxx.

Contract for the sale of land and commercial premises building was dated xxxx and completed on xxxx. Sale price was $xxxx.

The company has been registered for GST since 1 July 2000 but the individuals are not and have not been registered for GST.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 104-10

Income Tax Assessment Act 1997 - Section 108-5

Income Tax Assessment Act 1997 - Division 115

Income Tax Assessment Act 1997 - Subdivision 118-B

Income Tax Assessment Act 1997 - Section 128-15

Income Tax Assessment Act 1997 - Division 152

Reasons for decision

Capital gains and deceased estate

A capital gain or a capital loss may arise if a capital gains tax (CGT) event happens to a CGT asset. Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. Therefore the land and building is a CGT asset.

Under section 104-10 of the ITAA 1997 the disposal of a CGT asset causes a CGT event A1 to occur. You dispose of an asset when a change of ownership occurs from one entity to another entity.

A capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985.

On the death of a person, the property of the deceased generally passes to their estate. Where an asset passes to the deceased estate, the deceased estate is taken to have acquired the asset on the date of death. Any subsequent sale of the asset is assessable under the CGT provisions to the deceased estate. That is, if the executor sells the property under the terms of the will and as part of the deceased estate, then any capital gain/loss is assessable to the deceased estate.

If the asset was acquired by the deceased person before 20 September 1985, the first element of the cost base is the market value of the asset on the day the person died (section 128-15 of the ITAA 1997).

When determining the market value of property, the market valuation should be undertaken by a registered valuer or other appropriately qualified person. The valuation showing on a rates notice is not considered to be an appropriate market valuation of the property for CGT purposes. Any costs incurred in relation to obtaining the market value are also included in the cost base of the property.

Main residence exemption

Under Subdivision 118-B of the ITAA 1997 you can disregard a capital gain or capital loss that happens to a dwelling that is a main residence where certain conditions are met.

As the land and building are not a dwelling as defined in section 118-115 of the ITAA 1997, this exemption does not apply in your circumstances.

50% CGT discount

A discount capital gain is available under Division 115 of the ITAA 1997 where certain conditions are met.

As the land and the building was held by the deceased estate for over 12 months, the 50% discount applies.

Small business 50% reduction

The CGT provisions provide some small business relief in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997).

Basic conditions

To qualify for the small business CGT concessions, the basic conditions as contained in subdivision 152-A of the ITAA 1997 must be satisfied.

The basic conditions are:

•         A CGT event happens in relation to a CGT asset of yours in an income year,

•         The event would have resulted in a gain (apart from Division 152),

•         The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

•         At least one of the following applies;

-        you are a small business entity for the income year,

-        you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997,

-        you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or

-        you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.

Active asset test

Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy 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 test period, 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 test period.

Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

Subsection 152-40(4) of the ITAA 1997 provides some exclusions. None of the exclusions are relevant in your circumstances.

In this case, the deceased estate sold their 50% share of the land and building that was used by another connected entity and satisfies the active asset test.

The other basic conditions under subdivision 152-A of the ITAA 1997 have also been met.

Under subdivision 152-C of the ITAA 1997, where the basic conditions are satisfied you can apply the 50% small business reduction. There are no further requirements. Therefore, the deceased estate is entitled to apply the 50% small business reduction for the capital gain made on the sale of the land and building.

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