Edited version of private advice

Authorisation Number: 1052203387740

Date of advice: 26 February 2024

Ruling

Subject: Commissioner's discretion - small business concessions

Question 1

Will the Commissioner exercise the discretion under section 152-80 of the ITAA 1997, in relation to interest B, to allow the estate further time to apply the 15-year exemption?

Answer

Yes.

Question 2

Will the Commissioner exercise the discretion under section 118-195 and extend the two-year period in relation to interest A?

Answer

Yes.

Question 3

Does interest A satisfy the basic conditions for the small business capital gains tax (CGT) concessions?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commenced on:

1 July 2018

Relevant facts and circumstances

The deceased acquired a property prior to 1985 (interest A). The property included a main residence and was more than 2 hectares.

In 19XX the deceased transferred a 50% interest to their spouse.

Their spouse passed away in 19XX and the deceased acquired their 50% interest under the terms of the will (interest B).

The deceased lived in a dwelling on the property and it was their main residence up until they passed away.

The property was also used in a farming business operated by the deceased's relative.

The deceased passed away on in the 20XX-XX financial year.

The will of the deceased included a clause that permitted a relative to use the property for a defined period of time.

The relative operated a business from the property until it was sold on in the 20XX-XX financial year.

The executors of the estate sold the property and made a capital gain.

The assets of the estate and any affiliates or connected entities was less than $X million.

The relative was an affiliate of the estate.

The turnover of the relative's business was less than $X million.

The deceased would have been entitled to the 15-year exemption, in relation to interest B, had they sold the property just prior to their death.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-80

Reasons for decision

Question 1

Section 152-80 of the ITAA 1997 allows either the legal personal representative of an estate or the beneficiary to apply the small business capital gains tax (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, and
• the deceased would have been able to apply the small business concessions themselves 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.

Application to your circumstances

In this case, the property was transferred to the executor of the estate and the deceased would have been able to apply the small business 15-year exemption immediately prior to their death to interest B. The will of the deceased prevented the sale of the property during the period the relative had a right to use the land. We consider this to be beyond the control of the executors. Therefore, the Commissioner will grant an extension of time until the date of the CGT event in relation to interest B.

Question 2

As per subsection 118-195(1) of the ITAA 1997, a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling (or your ownership interest in it) is disregarded if:

(a) you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

(b) at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied.

Table 1: As per subsection 118-195(1) of the ITAA 1997, a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling (or your ownership interest in it) is disregarded if:

Application to your circumstances

In this case, the deceased acquired interest A before 20 September 1985 and the dwelling on the property was the deceased's main residence just before their death. We accept the delay in the sale of the property was outside the control of the executors and due to a clause that allowed a relative to use the property for a set period. Therefore, the Commissioner will grant an extension of time until the date the Estate's ownership interest ended in relation to interest A.

Further issues to consider

As the property was more than 2 hectares the estate will only get a partial exemption.

Question 3

To be eligible for the small business CGT concessions, you must first meet the basic eligibility conditions in section 152-10 of the ITAA 1997. If you meet the basic conditions, you can reduce the capital gain by 50%, known as the 50% active asset reduction.

Firstly, a CGT event must happen in relation to a CGT asset of yours and the event must result in a capital gain.

Further, at least one of the following must apply:

•         you are a CGT small business entity with an aggregated turnover of less than $2 million

•         you are not running a business but your asset is used in your affiliate or connected entity's small business

•         your are a partner in a partnership that is a small business entity

•         you meet the maximum net asset value test.

Lastly, the asset must satisfy the active asset test in section 152-35 of the ITAA 1997.

Affiliate

A small business affiliate is any individual or company that, in relation to their business affairs, acts or could reasonably be expected to act either:

• according to your directions or wishes
• in concert with you.

Whether a person acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, depends on the circumstances of the case. Relevant factors include:

• the existence of a close family relationship between the parties
• the lack of any formal agreement or formal relationship between the parties setting out how the parties are to act in relation to each other
• the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations
• the actions of the parties.

Active asset

An asset passes the active asset test if it has been an active asset of yours for at least:

• 7.5 years during the test period (if you've owned it for more than 15 years)
• half of the test period (if you've owned it for 15 years or less).

A CGT asset is an active asset if you (or your affiliate or entity connected with you) use it, or hold it ready for use, in running a business (or if it is an intangible asset, it is inherently connected with the business).

Application to your circumstances

In this case, when the estate sold interest A, a CGT event occurred which resulted in a capital gain. While the estate is not operating a business, we accept that interest A was used in the course of carrying on a business by an affiliate. The affiliate operates a business as a sole trader and has an aggregated turnover of less than $X million. As interest A has been used by an affiliate from the deceased's date of death up until it was sold it will satisfy the active asset test. Therefore, the estate is entitled to apply the 50% active asset reduction.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).