Edited version of private advice

Authorisation Number: 1052361110874

Date of advice: 19 February 2025

Ruling

Subject: Capital gains tax - deceased estates

Question 1

Will the Commissioner exercise their discretion for the Trust to be assessed under subsection 99(2) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 1

Yes.

Question 2

Will the capital gain derived from the sale of the Property in the year ended 30 June 20XX be a discount capital gain under Subdivision 115-A of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 2

Yes.

Question 3

Will the Commissioner exercise their discretion under subsection 152-80(3) of the ITAA 1997 to allow an extension of time to the two-year period?

Answer 3

Yes.

Question 4

If the Commissioner exercises their discretion in Question 3 to extend the 2-year time limit, is the Trust eligible for the small business active asset reduction under Subdivision 152-C of the ITAA 1997?

Answer 4

Yes.

Question 5

If the Commissioner exercises their discretion in Question 3 to extend the 2-year time limit, can the Trust apply the small business retirement exemption under Subdivision 152-D of the ITAA 1997?

Answer 5

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Deceased passed away. Consequently, the Deceased estate (the Trust) came into existence.

The Deceased and their Spouse purchased the Property on a date before 20 September 1985.

The Property was used and had always been used by the Deceased for various primary production business activities from its purchase until the Deceased passed away.

The Deceased held two interests in the Property, being:

•                     their original interest acquired before 19 September 1985; and

•                     an interest acquired from their deceased Spouse when they passed.

No special rights or privileges have been conferred on the estate or the property of the Trust. There have been no other transfers of property to the Trust. The Trust has not borrowed, or lent out, any property (including money), apart from funds owed to the Trustees for expenses that they have had to fund due to the Trust not having sufficient liquid assets.

A farming agreement was executed by one of the Trustees under power of attorney before the Deceased passed, to ensure the Property was maintained whilst the sale process was conducted.

Under the agreement a third party (the Operator) is permitted to occupy the Property the carry on a business of farming. Proceeds from the farming after taking out harvesting expenses were to be paid XX% to the landowner (the Deceased) and XX% to the Operator.

The Trustees engaged a real estate agent for the purposes of selling the Property. An agency agreement was drafted for the sale and finalised.

An offer for purchase was received from a third party but the Trustee considered that it was too low.

A revised offer was later received from the same offeror. This was accepted by the Trustees but was conditional upon the expiry of the pre-emptive right to purchase as per the Decease's Will.

Two beneficiaries of the Will then expressed that they wanted to exercise their pre-emptive rights to purchase the Property.

Valuations were obtained, however no offer to purchase was received from the beneficiaries. This delayed the sale process as the Trustees were legally prevented from negotiating offers to purchase from other interested parties.

As a result of the exercise of these rights, the first offeror rescinded their offer to purchase the property.

The Trust has been in a tax loss situation, even with the additional income from the agreement.

Additionally, the Trust also encountered a Local Council and environmental issue associated with rubbish being dumped on the Property.

The Trustees were notified by the Environmental Protection Authority ("EPA") and Local Council. Once notified, the following steps had to occur:

•                     Local Council sent a letter to the estate regarding allegations of the Property being used as an unlicensed landfill.

•                     Following an inspection by council officers, a Notice was issued to the Trust.

•                     Environmental consultants were engaged by the Trust in accordance with the process outlined in Council's Notice.

•                     Clean-up activities were conducted on the Property.

•                     The clean-up was completed.

•                     Environmental consultants provided final validation report stating all clean-up activities had been completed in accordance with environmental requirements.

•                     Local Council issued a certification of Revocation of Clean-up Order.

Various other offers were received during the intervening period until an offer was finally accepted by all parties and contracts were signed.

Settlement of the contracts occurred.

Following an agreement being reached, there were several legal challenges involving the Operator:

•                     Legal argument pertaining to the ongoing validity of the farming agreement and in relation to the execution of the right to purchase, plus the issue of the evocation of the right to purchase, caused significant delays in the sale process.

•                     There were disputes between the Operator and the Trust regarding the ongoing operation of the farming agreement which included the farmer being issued with breach notices.

The contract for sale contained a condition precedent that the EPA and Council clean-up orders were complied with.

During these events the Property was never taken off the market and remained advertised for sale.

For the relevant income years, the aggregated turnover from the farming business the Deceased carried on was less than $XX in each year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Division 152-A

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 Division 152-C

Income Tax Assessment Act 1997 Division 152-D

Income Tax Assessment Act 1997 section 328-110

Reasons for decision

Question 1

Will the Commissioner exercise their discretion for the Trust to be assessed under subsection 99(2) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Detailed reasoning

Section 99A of the ITAA 1936 applies in the case of trust estates of deceased persons unless the Commissioner, pursuant to subsection 99A(2) of the ITAA 1936, forms the opinion that it would be unreasonable for section 99A of the ITAA 1936 to apply in relation to the deceased estate in relation to the particular year of income.

In exercising the discretion, the Commissioner will have reference to the text of the legislation itself, the intent or purpose of the legislation and relevant case law as they apply to the facts and circumstances of a particular case for the purpose of forming the required opinion under subsection 99A(2) of the ITAA 1936.

The types of trust estate in respect of which the Commissioner's discretion may be exercised are listed in paragraphs 99A(2)(a) to (d) of the ITAA 1936 and include a trust estate that resulted from a will (paragraph 99A(2)(a) of the ITAA 1936).

In forming the opinion for the purposes of subsection 99A(2) of the ITAA 1936 the Commissioner is required to have regard to the matter subsections 99A(3) and (3A) of the ITAA 1936 as follows:

(3) In forming an opinion for the purposes of subsection (2):

(a) the Commissioner shall have regard to the circumstances in which and the conditions, if any, upon which, at any time, property (including money) was acquired by or lent to the trust estate, income was derived by the trust estate, benefits were conferred on the trust estate or special rights or privileges were conferred on or attached to property of the trust estate, whether or not the rights or privileges have been exercised;

(b) if a person who has, at any time, directly or indirectly:

(i) transferred or lent any property (including money) to, or conferred any benefits on, the trust estate; or

(ii) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of the trust estate whether or not the right or privilege has been exercised.

has not, at any time, directly or indirectly:

(iii) transferred or lent any property (including money) to, or conferred any benefits on, another trust estate; or

(iv) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of another trust estate, whether or not the right or privilege has been exercised;

the Commissioner shall have regard to that fact; and

(c) the Commissioner shall have regard to such other matters, if any, as he or she thinks fit.

(3A) For the purposes of the application of paragraph (3)(a) in relation to a trust estate of the kind referred to in paragraph (2)(a), a reference in that first-mentioned paragraph to the trust estate shall be read as including a reference to the person as a result of whose death the trust estate arose.

Application to your situation

We have taken the following into consideration when determining whether the Commissioner's discretion will be exercised:

•                     The Trust is a deceased estate that resulted from the Will of the Deceased which satisfies the requirement of paragraph 99A(2)(a).

•                     The Trust has not borrowed or lent any money. The Trust has not held assets or funds other than: assets that were owned by the Deceased, funds from income earned by those assets, or funds from the sale of those assets. There are no special rights or privileges attached to any property of the Trust.

•                     The Trustee is the executor of a deceased estate and has exercised their powers under the Will in a conventional manner (and not as a tax-avoidance device).

•                     The Trust is a deceased estate wherein the assets of the Deceased are being administered in a conventional manner.

Having regard to the above matters, and the legislated purpose of section 99A of the ITAA 1936 to prevent the use of trusts for tax avoidance, the Commissioner is of the opinion that it is unreasonable for section 99A of the ITAA 1936 to apply to the Trust in respect of the relevant year.

Therefore, the Commissioner's discretion will be exercised.

Question 2

Will the capital gain derived from the sale of the Property be a discount capital gain under Division 115 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Detailed reasoning

Under Division 115 of the Income Tax Assessment Act 1997 (ITAA 1997), to qualify for the general discount a capital gain must be made by a Trust. The capital gain must result from a capital gains tax (CGT) event happening after 11:45am on 21 September 1999 and must not have an indexed cost base. Also, the gain must result from a CGT event happening to an asset that was acquired at least 12 months before the CGT event. If the Trust was at no time a foreign or temporary resident, then the discount amount is 50%.

Application to your circumstance

In this case the Trust made a capital gain resulting from the sale of the Deceased's Property after XX September 19XX. The Trust held the Property for more than XX months before the CGT event occurred and was at no time a foreign or temporary resident. Therefore, the Trust is entitled to the XX% general discount under Division 115 of the ITAA 1997 for the capital gain made on the disposal of the Property.

Question 3

Will the Commissioner exercise their discretion to allow an extension of time to the two-year period under subsection 152-80(3) of the ITAA 1997?

Detailed reasoning

Section 152-80 of the ITAA 1997 says that a CGT event happens to an asset or interest within 2 years of individual's death.

Subsection 152-80(1) of the ITAA 1997 states this section applies if:

(a) a CGT asset:

(i) forms part of the estate of a deceased individual; or

(ii) was owned by joint tenants and one of them dies; and

(b) any of the following applies:

(i) the asset devolves to the individual's legal personal representative;

(ii) the asset passes to a beneficiary of the individual;

(iii) an interest in the asset is acquired by the surviving joint tenant or tenants (as the case may be) as mentioned in section 128-50 ITAA 1997;

(iv) the asset devolves to a trustee of a trust established by the will of the individual; and

(c) the deceased individual referred to in subparagraph (a)(i) or (ii) would have been entitled to reduce or disregard a capital gain under this Division if a CGT event had happened in relation to the CGT asset immediately before his or her death; and

(d) a CGT event happens in relation to the CGT asset within 2 years of the individual's death.

Subsection 152-80(3) of the ITAA 1997 says that the Commissioner may extend the time limit in paragraph (1)(d).

In determining whether to allow an extended asset replacement period, the Commissioner considers the following factors:

•                     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

•                     the need to ensure fairness to people in like positions and the wider public interest

•                     whether there is mischief involved, and

•                     the consequences of the decision.

Application of circumstance.

In this case, there were legal issues about the farming agreement. Additionally, the estate also encountered a Local Council and environmental issues associated with rubbish being dumped on the Property.

Accordingly, the Commissioner has considered your facts and circumstances will exercise the discretion under subsection 152-80(3) of the ITAA 1997 and extend the period for the Trust to dispose of the Property to July 2021.

Question 4

If the Commissioner exercises their discretion in Question 3 to extend the 2-year time limit, is the Trust eligible for the small business active asset reduction under Subdivision 152-C of the ITAA 1997?

Detailed reasoning

Under Subdivision 152-C A capital gain is reduced by XX% if the basic conditions in Subdivision 152-A are satisfied. If the capital gain has already been reduced by the discount percentage, the XX% reduction under this Subdivision applies to that reduced gain.

The capital gain may be further reduced by the small business retirement exemption or a small business rollover, or both.

None of these rules apply if the 15-year exemption already applies to the capital gain, since such a gain is disregarded anyway.

To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. Division 152-C of the ITAA 1997 applies the small business XX% active asset reduction provided the basic conditions are satisfied.

A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied:

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

•                     the event would have resulted in a gain

•                     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

The active asset test outlined in section 152-35 of the ITAA 1997. The active asset test is satisfied 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 period specified in subsection (2); 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 7 ½ years during the period specified in subsection (2).The test period beings when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business.

Section 152-40 of the ITAA 1997 explains that a CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

Small Business entity

Section 328-110 defines the meaning of a small business entity to be:

You are a small business entity for an income year (the current year) if:

(a) you carry on a business in the current year; and

(b) one or both of the following applies:

(i) you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $2 million;

(ii) your aggregated turnover for the current year is likely to be less than $2 million.

In your circumstances

The sale of the Property resulted in a capital gain in the 20XX financial year. The Deceased was carrying on a small business and the aggregated turnover from the farming business has never exceeded $XX.

The Deceased received their Spouse's XX% interest in 20XX and the Deceased passed in 20XX so the interest was owned for X years, and it was an active asset for its entire ownership period. Therefore, the Property is an active asset per section 152-40 of the ITAA 1997 and satisfies the active asset test.

As the Deceased only held the Property for X years and not XX years so the 15-year exemption does not apply.

Accordingly, The Trust satisfy the basic conditions and by extension the eligibility criteria required to access the small business XX% reduction.

Question 5

If the Commissioner exercises their discretion in Question 3 to extend the 2-year time limit, can the Trust apply the small business retirement exemption under Subdivision 152-D of the ITAA 1997?

Detailed reasoning

Subdivision 152-D of the ITAA 1997 sets out the conditions for the small business retirement exemption. If you are an individual, you can choose to disregard all or part of a capital gain under this provision if:

a)            you satisfy the basic conditions

b)            if you were under 55 years of age just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account (RSA).

Ordinarily the retirement exemption requires a taxpayer under 55 to make a contribution to a complying super fund. However, where the taxpayer has passed away, this requirement is no longer necessary (see subsection 152-80(2)(b) ITAA 1997).

Therefore, when you make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or RSA even though you may have been under 55 years of age when you received the capital proceeds.

The contribution must be made:

•                     when you made the choice to use the retirement exemption, or when you received the proceeds (whichever is later), or

•                     if the relevant event is CGT event J2, J5 or J6 - when you made the choice to use the retirement exemption.

An individual's CGT retirement exemption limit is $500,000 reduced by the CGT exempt amounts of CGT assets specified in choices previously made by or for the individual under subdivision 152-D of the ITAA 1997.

In your circumstances

In this case the Trust meets the basic conditions, but the Deceased must meet the retirement exemption conditions.

As the Trust is applying section152-80 when they make the choice to access the retirement exemption, there is no requirement to pay the exempt amount to a complying superannuation fund or RSA.

The Trust can choose to apply the retirement exemption to reduce the capital gain. Note there is a retirement exemption lifetime limit of $XX. The Trust should keep a written record of the amount you choose to disregard.

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