Edited version of private advice

Authorisation Number: 1052392873837

Date of advice: 15 May 2025

Ruling

Subject: CGT - 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 2-year time limit, in paragraph 152-80(1)(d) of the ITAA 1997 by which CGT event A1, happens to the executors of the estate of the deceased in relation to the Land?

Answer 1

Yes, until DD July 20XX.

Question 2

For the purposes of paragraph 152-80(1)(c) of the ITAA 1997, would the deceased have satisfied the basic conditions for relief under section 152-10 of the ITAA 1997 for a capital gain which they would have realised had the Land been disposed of immediately before their death?

Answer 2

Yes.

Question 3

For the purposes of paragraph 152-80(1)(c) of the ITAA 1997, would the deceased have satisfied the additional conditions for the small business 15-year exemption for individuals under section 152-105 of the ITAA 1997 for a capital gain which they would have realised had the Land been disposed of immediately before their death?

Answer 3

Yes.

Question 4

If the answer to Q3 is 'no', for the purposes of paragraph 152-80(1)(c) of the ITAA 1997, would the deceased have been eligible to access the small business 50% reduction under Subdivision 152-C of the ITAA 1997 and the small business retirement exemption under Subdivision 152-D of the ITAA 1997 for a capital gain which they would have realised had the Land been disposed of immediately before their death?

Answer 4

Not applicable as the answer to Question 3 is yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

Relevant facts and circumstances

1.            The deceased was born outside of Australia.

2.            They immigrated to Australia in the 19XXs and worked in the agricultural industry.

3.            The deceased worked as a farmhand from the 19XXs to the mid-19XXs. During that time the deceased also leased XX acres of farmland to operate their own farm.

4.            The deceased acquired a farm (the Property) in the early 19XXs. The Property was the main residence of the deceased and their spouse. It has a land size of approximately XX acres, a portion of which was used by the deceased to conduct agricultural activities. The Property was also used as the registered office address for all of the deceased's farming business activities.

5.            The deceased also acquired the Land in the late 19XXs. The Land is approximately XX acres on which the deceased carried out a range of primary production activities.

6.            Noteworthy farming activities and capital improvements carried out by the deceased on the Land since its acquisition in the late 19XXs are set out below:

Table 1: Noteworthy farming activities

7.            With the assistance of their family members, the deceased would typically spend at least X to X hours a day conducting general farming activities and undertaking seasonal farming activities and practices as set out below:

Table 2: Seasonal activity

8.            The deceased's health declined from 20XX.

9.            As a consequence of their deteriorating health, the deceased was forced to downsize their farming operations on the Land. The deceased nevertheless continued to carry on their farming activities on a reducing scale until they passed away in 20XX.

10.         The deceased's will appointed 4 members of their family (including their spouse) as Executors.

11.         Following the deceased's passing, the Executors continued to carry on some farming activities, including:

•                     maintaining the ABN, an insurance policy for the farm, the Land in accordance with a regulatory bushfire plan, and land tax exemption for primary production land

•                     tending to existing livestock; and

•                     selling produce.

12.         The Executors were granted probate in XXX 20XX.

13.         The Executors explained that the long the delays in applying for probate was largely due to the following:

(a)          After the deceased's death, it was important for the Executors to operate unanimously and involve the deceased's spouse. The deceased's spouse was experiencing their own significant health struggles from 20XX, which impacted their ability to attend meetings for the estate and forced the family to prioritise their health.

(b)          There were multiple Executors involved in the administration of the estate which necessitated more discussions and time to resolve differences and reach a collective agreement on the various decisions required to be made, particularly given they often held differing opinions, understandings and expectations as to how the estate was to be managed. There were also disagreements regarding the division of the estate amongst the beneficiaries, an issue which was only ultimately decided in early 20XX upon execution of a Family Agreement.

(c)           The estate was relatively complex and consisted of a fair amount of assets, including a number of commercial properties which required separate independent valuation (obtained between XXX and XXX 20XX), and a number of accounts with different banks as well as superannuation and retirement funds which took a while to wind up. The Executors were also required to:

•                    prepare one of the estate's properties for leasing (i.e. renovate and ensure compliance with regulatory fire prevention measures);

•                    prepare the Land for water works which were ongoing until late 20XX; and

•                    arrange the transfer of the registration of farm equipment to the estate.

Due to the number of assets forming part of the estate, the Executors were required to make more collective decisions.

14.         The Executors obtained the certificate of title for the Land from the XXX Land Titles Register in XXX 20XX.

15.         The Executors discussed and explored different options with the Land, including to continue a farming business by planting different crops, but ultimately agreed against the continuation of such a business on the basis that it would be costly and labour intensive.

16.         Instead, from XXX 20XX the Executors began to initiate numerous discussions with potential property lawyers and vendor advocates to assist them to sell the Land, and ultimately engaged a vendor advocate in XXX 20XX to commence the sale process.

17.         However, the sale process was significantly delayed due to the onset of the COVID-19 pandemic in early 2020. The Executors and vendor advocate agreed to postpone the sale of the Land in XXX 2020 due to the ongoing pandemic and economic uncertainties.

18.         The Executors decided to resume the sale of the Land in XXX 2020 on account of easing COVID-19 lockdown requirements and the significant increase of the Land's holding costs (i.e. land tax).

19.         On account of the unhappy differences between the Executors in respect of the administration of the estate, a deed of family agreement was entered into by the Executors in XXX 20XX. The deed, among other things, provided that:

(a)          the Executors agree to immediately engage selling agents and negotiate in good faith the sale of the Land;

(b)          the deceased's spouse, having obtained independent advice as to the terms and ambit of the deed, surrenders their estate and interest in the proceeds of the sale of the Land; and

(c)          the Executors shall collectively and individually use their best efforts to sell the Land by XX XXX 20XX.

20.         Following careful deliberation and contemplation regarding a suitable selling agent (having conducted several meetings and interviews with different candidates), the Executors appointed a selling agent for the Land in XXX 20XX.

21.         The Executors entered into a contract for the sale of the Land to an unrelated third party on XX XXX 20XX.

22.         No entity was connected with the deceased in the 20XX income year pursuant to section 328-125 of the ITAA 1997, and no entity was an affiliate of the deceased in the 20XX income year pursuant to section 328-130 of the ITAA 1997.

23.         The deceased's aggregated turnover for the 20XX income year was less than $2 million.

24.         The deceased was an Australian resident for tax purposes at all relevant times.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 subsection 152-10(1)

Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(i)

Income Tax Assessment Act 1997 paragraph 152-10(1)(d)

Income Tax Assessment Act 1997 subsection 152-10(1AA)

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-35(2)

Income Tax Assessment Act 1997 paragraph 152-40(1)(a)

Income Tax Assessment Act 1997 subsection 152-40(4)

Income Tax Assessment Act 1997 section 152-80

Income Tax Assessment Act 1997 paragraph 152-80(1)(a)

Income Tax Assessment Act 1997 paragraph 152-80(1)(b)

Income Tax Assessment Act 1997 paragraph 152-80(1)(c)

Income Tax Assessment Act 1997 paragraph 152-80(1)(d)

Income Tax Assessment Act 1997 paragraph 152-80(2)(a)

Income Tax Assessment Act 1997 subsection 152-80(3)

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 328-130

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

All subsequent legislative references are to the ITAA 1997.

Summary

For the purposes of paragraph152-80(1)(c), the deceased would have satisfied the basic conditions for relief under section 152-10 and the additional conditions for the small business 15-year exemption for individuals under section 152-105 for a capital gain which they would have realised had the Land been disposed of immediately before to their death.

The Commissioner will exercise the discretion under subsection 152-80(3) to extend the 2-year time limit in paragraph 152-80(1)(d) by which CGT event A1 happens to the Executors in relation to the Land. The date until which the time limit is extended is DD July 20XY.

Detailed reasoning

Section 152-80 allows the legal personal representative of a deceased individual to reduce or disregard a capital gain under Division 152 where:

•                     a CGT asset forms part of the estate of the deceased individual (paragraph 152-80(1)(a));

•                     the asset devolves to that legal personal representative (paragraph 152-80(1)(b));

•                     the deceased individual would have been entitled to reduce or disregard a capital gain under Division 152 if a CGT event had happened in relation to the CGT asset immediately before their death (paragraph 152-80(1)(c)); and

•                     a CGT event happens in relation to the asset within 2 years of the individual's death, unless the Commissioner extends that time limit in accordance with subsection 152-80(3) (paragraph 152-80(1)(d)).

The Land is a CGT asset under section 108-5 which (until the time of its disposal by the Executors) formed part of the estate of the deceased.

A 'legal personal representative' is defined in subsection 995-1(1) to include an executor of an estate of an individual who has died. The Executors are the deceased's legal personal representative and the Land devolved to them following their death.

Paragraph 152-80(1)(c)

To be entitled to reduce or disregard a capital gain under Division 152, had a CGT event happened to the deceased in relation to the Land immediately before their death (as required by paragraph 152-80(1)(c)), the basic conditions under section 152-10 need satisfying for the gain.

The basic conditions are set out in subsection 152-10(1) as follows:

(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 the gain;

(c)           at least one of the following applies:

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

(ii)            you satisfy the maximum net asset value test (see section 152-15);

(iii)            you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership;

(iv)            the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;

(d)           the CGT asset satisfies the active asset test (see section 152-35).

Had the deceased disposed of the Land immediately before their death, CGT event A1 under section 104-10 would have happened in relation to the Land in the 20XX income year and that event (apart from Division 152) would have resulted in a capital gain, thereby satisfying paragraphs 152-10(1)(a) and (b).

For the purposes of subparagraph 152-10(1)(c)(i), a 'CGT small business entity' for an income year is defined in subsection 152-10(1AA) to mean an entity which:

•                     is a small business entity for the income year; and

•                     would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million.

Broadly, section 328-110 defines a 'small business entity' for an income year as an entity that carries on a business in that year and:

•                     both carried on a business in the previous income year and had an aggregated turnover for that year of less than $10 million; or

•                     its aggregated turnover for the current year is likely to be less than $10 million and, where it carried on a business in each of the 2 previous income years, the aggregated turnover for each of those income years was less than $10 million; or

•                     its aggregated turnover for the current year, worked out as at the end of the year, is less than $10 million.

Therefore, for the purposes of subparagraph 152-10(1)(c)(i), the deceased was a CGT small business entity for the 20XX income year pursuant to subsection 152-10(1AA) on the basis that:

•                     they carried on a business in the 20XX income year; and

•                     they carried on a business in the 20XX income year and their aggregated turnover for the 20XX income year was less than $2 million.

For the purposes of paragraph 152-10(1)(d), a CGT asset satisfies the active asset test under section 152-35 if:

•                     the entity has owned the asset for 15 years or less and the asset was an active asset of the entity for a total of at least half of the relevant period; or

•                     the entity has owned the asset for more than 15 years and the asset was an active asset of the entity for a total of at least 7.5 years during the relevant period.

The relevant period for these purposes begins when the entity acquires the asset and ends at the happening of a CGT event (subsection 152-35(2)).

Subject to the application of any exception under subsection 152-40(4), a CGT asset that is real property is an 'active asset' at a time pursuant to paragraph 152-40(1)(a) if, at that time, an entity owns it and it is used, or held ready for use, in the course of carrying on a business that is carried on by the entity, its affiliate or another entity connected with the owner.

The Land satisfied the active asset test in section 152-35 on the basis that:

•                     it was used by the deceased in the course of carrying on their business throughout the relevant period (i.e. from the time it was acquired by them in the late 19XXs until its disposal, had the CGT event happened immediately before their death) and therefore was an active asset for more than 7.5 years; and

•                     none of the exceptions under subsection 152-40(4) apply.

On the basis of the above, the deceased would have satisfied the basic conditions for relief under section 152-10 for a capital gain which they would have realised had the Land been disposed of immediately before their death.

The small business 15-year exemption under Subdivision 152-B permits a CGT small business entity to disregard a capital gain on an asset subject to meeting certain conditions.[1]

Section 152-105 sets out the conditions that an individual must satisfy so as to disregard any capital gain arising from a CGT event. For CGT assets other than a share in a company or an interest in a trust, they are:

•                     the basic conditions in Subdivision 152-A are satisfied for the gain;

•                     the individual continuously owned the CGT asset for 15 years just before the CGT event; and

•                     at the time of the CGT event, the individual is either 55 years or over and the event happens in connection with the individual's retirement, or the individual is permanently incapacitated.

However, pursuant to the application of paragraph 152-80(2)(a) the last requirement that the CGT event happens in relation to the retirement of the individual does not need to be met; and the deceased is merely required to have been 55 or over or permanently incapacitated at the of the CGT event (immediately before their death).

The deceased would have met all the relevant requirements under section 152-105 (as modified by paragraph 152-80(2)(a)) had the Land been disposed of immediately before their death on the following basis:

•                     the basic conditions in Subdivision 152-A are satisfied for the capital gain (as discussed above);

•                     the deceased continuously owned the Land for 15 years just before the CGT event; and

•                     they were over 55 at the time of the CGT event.

The deceased would therefore have been eligible to disregard the capital gain in relation to the Land had it been sold immediately before their death.

Paragraph 152-80(1)(d) and subsection 152-80(3)

CGT event A1 under section 104-10 happened in relation to the Land on DD XXX 20XX, when the Executors entered into a contract for its sale (subsection 104-10(3)). The disposal did not occur within 2 years of the deceased's death, thereby exceeding the statutory time limit under paragraph 152-80(1)(d).

Consequently, despite the fact that the deceased would have been entitled to disregard a capital gain under Division 152 if the Land had been sold immediately before their death, the Executors are not eligible to do likewise to the actual capital gain arising from the disposal of the Land unless the Commissioner extends the time by which the disposal could happen to at least DD XX 20XX.

In determining whether the discretion to allow further time would be considered pursuant to subsection 152-80(3), the Commissioner may give regard to the following factors set out in Hunter Valley Developments Pty Ltd and Ors v Cohen[2]:

•                     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);

•                     prejudice to the Commissioner which may result from the additional time being allowed (but the mere absence of prejudice is not enough to justify the granting of an extension);

•                     unsettling of people, other than the Commissioner, or of established practices;

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

•                     whether any mischief is involved; and

•                     consequences of the decision.

Based on the evidence provided by the Executors, their inability to enter into a contract for the disposal of the Land within 2 years of the death of the deceased, and the period for which an extension of time by which the CGT event did occur (to DD XXX 20XX), is explicable by circumstances and factors outside of their control. These largely include:

•                     the poor health of the deceased's spouse which needed to be prioritised and significantly delayed the ability of the Executors to meet and reach consensus on a number of decisions relating to the administration of the estate prior to making an application for probate;

•                     the number of Executors involved and the time needed to reach consensus on important decisions relating to the administration of the estate (some of which were only resolved in early 20XX via execution of the Family Agreement);

•                     delays relating to the obtainment of multiple property valuations and the closure of superannuation and retirement fund accounts; and

•                     the delays to the sale process caused by COVID-19 and the consequent government-imposed lockdowns throughout large parts of 2020 and parts of 2021.

The granting of an extension until DD XXX 20XX is considered fair and equitable in these circumstances. There is no evidence of mischief on behalf of the Executors and it is accepted that the granting of the extension does not prejudice the Commissioner, nor cause any unsettling of people or of established practices.

Having regard to the above, it is considered appropriate for the Commissioner to exercise the discretion under subsection 152-80(3) to extend the time limit by which the entry into a contract for the disposal of the Land by the Executors could happen to DD XX 20XX.

The consequence of the decision allows the Executors to maintain their entitlement to apply the small business 15-year exemption under Subdivision 152-B to the capital gain arising from the disposal of the Land in the 20XX income year.

[1] Where the taxpayer applies the small business 15-year exemption, the entire capital gain in relation to a CGT asset is disregarded, thereby dispensing with the need to apply the other available small business CGT concessions.

[2] (1984) 3 FCR 344.

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