Edited version of private advice

Authorisation Number: 1052201061027

Date of advice: 6 December 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question 1

Will the Commissioner exercise the discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the time limit under subsection 152-80(1)(d) of the ITAA 1997 in relation to the sale of property 1 and property 2?

Answer

Yes.

Question 2

Can the Estate apply the 15 year exemption to the sale of property 1 acquired in 1988 and property 2 acquired in 1989?

Answer

Yes.

This private ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

Individual A died in August 20XX.

Individual A ran a primary production business as a sole trader on property 1 and property 2 most of his life. His parent farmed the land, and he inherited it after his parent's death.

The land comprises 2 titles. Property 1 was individual A's main residence and was a direct legacy under his parent's will and passed to individual A in 19XX.

Property 2 also came via his parent's estate in 19XX.

Property 1 and property 2 adjoin each other and both formed an integral part of the farming operation.

Probate was granted in the 20XX income year to individual 2 and individual 3.

Individual 3 then registered a caveat over the land and commenced legal action to challenge the will. He consequently resigned as an executor.

A second probate was granted in the 20XX income year to individual 2 solely.

The legal action drew out and was finally settled in the 20XX income year and a court order approved in the 20XX income year.

As soon as this was settled the executor started making plans to sell property 1 and property 2.

He had meetings with a town planner, property agents and developers.

He then had interest from a purchaser for property 1 and after negotiations over price, property 1 was sold in the 20XX income year.

A draft agreement was presented for the sale of property 2 and a contract signed in the 20XX income year. The property settled in the 20XX income year.

Individual A's turnover was less than $2 million at all times.

Individual A did not have a spouse and did not have any associates.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-80

Income Tax Assessment Act 1997 subsection 328-110

Reasons for decision

Deceased estate and small business CGT concessions

Under section 152-80 of the Income Tax Assessment Act 1997 (ITAA 1997), the legal personal representative or beneficiary of the deceased estate will be eligible for the small business CGT concessions where:

•         the asset is disposed of within two years of the date of death, and

•         the asset would have qualified for the small business CGT concessions if the deceased had disposed of the asset immediately before their 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.

Basic conditions

Subdivision 152-A of the ITAA 1997 contains the basic conditions that must be satisfied for small business CGT relief. The basic conditions, as set out in subsection 152-10(1) of the ITAA 1997 are:

(a)  a CGT event happens in relation to a CGT asset of yours in an income year

(b)  the event would (apart from this Division) have resulted in a gain

(c)   at least one of the following applies:

(i)     you are a small business entity for the income year

(ii)     you satisfy the maximum net asset value test

(iii)   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

(iv)   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.

(d)  the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997

Small business entity

An entity satisfies the small business entity test if:

(a)  it carries on a business in the current year, and

(b)  one or both of the follow applies:

(i)     it carried on a business in the income year (the previous year) before the current year and its aggregated turnover for the previous year was less than $2m, and

(ii)     its aggregated turnover of the current year is likely to be less than $2m (subsections 152-10(1AA) and 328-110(1)) of the ITAA 1997

Active asset test

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 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 152-35(1) of the ITAA 1997).

The test period begins when you acquired the asset and ends at the time of the CGT event (subsection 152-35(2) of the ITAA 1997).

Subsection 152-40(1) of the ITAA 1997 details 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.

15 year exemption

An entity can disregard a capital gain from a CGT event happening to a CGT asset if:

•         the basic conditions are satisfied

•         the asset has been continuously owned for the 15-year period ending just before the CGT event happened.

If you are an individual you must also meet the following conditions:

•         when the CGT event happened you were permanently incapacitated or at least 55 years old and the event happened in connection with your retirement

Note the 15 year exemption can also be chosen if the deceased had met the requirements, except that it is not necessary for the CGT event to have happened in relation to the retirement of the individual.

Application to the circumstances

Question 1

In this case, we consider that you provided a reasonable explanation for the delay in the disposal of the two CGT assets. A protracted legal dispute impacted the sale of property 1 and property 2. We do not consider that allowing this request would cause the unsettling of others 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.

Question 2

In this case, the deceased would have satisfied the basic conditions because:

•         the deceased would have made a capital gain had they disposed of the 2 properties just prior to their death

•         the deceased satisfied the small business entity test just prior to their death

•         the two properties were continuously owned for more than 15 years just prior to their death

•         the two properties were active assets for more than 7 ½ years

Therefore, the Estate is entitled to disregard the capital gain made in relation to the sale of property 1 and property 2 acquired by the deceased in 19XX and 19XX under the 15 year exemption.

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