Edited version of private advice

Authorisation Number: 1052103036139

Date of advice: 12 July 2023

Ruling

Subject: CGT - small business concessions

Question 1

Has the Deceased Estate satisfied the basic conditions for small business capital gains tax (CGT) concessions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the disposal of the Property?

Answer

Yes. The Deceased Estate sold the Property to an unrelated party, which triggered a CGT event and resulted in a capital gain. The Deceased Estate was a partner in a partnership that was a CGT small business entity for the income year and the partnership used the Property in the course of carrying on its business. The Deceased Estate has held the asset for less than 15 years and it has been an active asset for at least half of the period of ownership. Further information on the basic conditions can be found by searching 'QC 44192' on ato.gov.au

Question 2

Does the Property satisfy the active asset test under section 152-35 of the ITAA 1997?

Answer

Yes. From the date of acquisition of the Property, being the time of the Deceased's death until the sale of the Property, the Property was used for the carrying on of a primary production business by the Deceased Estate and the Deceased's spouse in partnership, such that it was an active asset during this period of time.

The Deceased Estate owned the Property for less than 15 years and the asset was active for more than half of the ownership period. Consequently, the active asset test is satisfied for the Property.

Question 3

Is the deceased estate entitled to apply the main residence exemption to part of their property in order to be exempt from CGT?

Answer

Yes. Under section 118-195 of the ITAA 1997, a capital gain or capital loss made in relation to a dwelling or your ownership interest in it is disregarded if the deceased acquired the dwelling prior to 20 September 1985 and the disposal of the property happened within two years of the deceased's death (or a longer period where the Commissioner exercises his discretion) or from the deceased's death until you disposed of your ownership interest, the dwelling was the main residence of the Deceased's spouse.

In this case, disposal of the Property happened over two years after the deceased's death and it was used as the main residence of the Deceased's spouse until they moved into another dwelling. If the executor of the Deceased's spouse estate elects to continue to treat the Property as the Deceased's spouse main residence until it's disposal, it will satisfy the requirements of section 118-195 of the ITAA 1997 in that it was the main residence of the spouse of the Deceased until disposal. Alternatively, the Commissioner will exercise the discretion to extend the two-year period to dispose of the Deceased's estate's interest in the Property. Consequently, the deceased estate is entitled to the main residence exemption for the dwelling and two hectares of adjacent land to the extent that the land was used primarily for private or domestic purposes in association with the dwelling.

Question 4

Does the granting of a life interest trigger a CGT event for the estate?

Answer

No. The granting of the equitable life interest to the Deceased's spouse does not trigger a CGT event for the estate. In this case, an equitable life interest in the farm property was created, not a legal life interest. Therefore, no part of the freehold interest was disposed of by the trustees and the granting of the equitable life interest to the Deceased's spouse did not trigger a CGT event for the estate.

Question 5

Does the granting of the life interest affect the cost base of a property?

Answer

No. The granting of the life interest to the Deceased's spouse does not affect the cost base of a property. The granting of the life interest to the Deceased's spouse did not trigger a CGT event for the estate as explained above, there is no effect on the cost base of the property.

Question 6

Does the sale of a property with a life interest constitute surrendering that life interest?

Answer

Yes. The Deceased's will provided the Deceased's spouse with an equitable life interest in the entire farm for their life. It also gave them the right to request the trustees to sell the farm and require them to use the proceeds to acquire a replacement property in which the life interest would continue or invest the proceeds and give her all the income derived.

A contract for the sale of the farm to an unrelated third-party purchaser was entered into. The contract terms provided for payments to be made in several instalments and possession of the farm was to transfer after the date of signing but prior to settlement. Possession of the farm under the contract transferred to the purchaser in that year.

Consequently, the Deceased's spouse's life interest in respect to the farm property ended as her right to possession ended at that time. Therefore, the Deceased's spouse surrendered her life interest in the property and CGT event C2 happened at that time.

This ruling applies for the following period:

Year ending 30 June 2021

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

The Deceased passed away over the age of 55.

Prior to their death, the deceased acquired property before 20 September 1985 as joint tenants with their spouse.

The Property's residential house was used by the Deceased as their main residence.

The Property's farmland was used in carrying on a primary production business by the deceased and their spouse in a partnership since its acquisition.

The Partnership carried on a business and had an aggregated turnover of less than $X Million.

The Deceased bequeathed their share in the Property to their children in equal shares.

The Deceased's will also provided their spouse with an equitable life interest in the Property for their life. It also gave them the right to request the trustees to sell the farm and require them to use the proceeds to acquire a replacement property in which the life interest would continue or invest the proceeds and give them all the income derived.

The Deceased's spouse and the Deceased Estate continued to carry on the business in partnership after the Deceased's death.

A contract for the sale of the Property has been signed. The contract terms were payments to be made in several instalments and possession was to transfer after the date of signing, but prior to settlement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

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

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