Edited version of private advice

Authorisation Number: 1052400302452

Date of advice: 28 May 2025

Ruling

Subject: CGT - small business concessions

Question 1

Will the Commissioner exercise the discretion in subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the 2-year time limit to DD MM 20XX so that you can apply the small business capital gains tax (CGT) concessions to the capital gain resulting from the sale of the property?

Answer

Yes.

Question 2

Are you eligible to apply the small business 15-year exemption under Subdivision 152-B of ITAA 1997 in relation to the 50% interest in the property acquired on DD MM 19XX?

Answer

Yes.

This ruling applies for the following period:

Year ended DD MM 20XX

The scheme commenced on:

DD MM 20XX

Relevant facts and circumstances

You are the executor of the deceased's estate.

The deceased and their late spouse purchased a factory in an industrial complex over 30 years ago. The property was purchased specifically to operate their business.

From acquisition, they were in a partnership which derived rental income from companies that operated the business on the property. Together they used multiple company entities to operate the business. You have provided details for each company owned by the deceased and their late spouse. They were both the sole directors and shareholders of most of the companies. The deceased's late spouse was the sole director and shareholder of a few of the companies.

Approximately XX years after acquiring the property, the deceased's late spouse retired from actively managing the business due to ill health. One of the companies was the owner of residual equipment used in the business. The property was rented to operators who took over the business, without any consideration, but who bought on terms / paid rent for the use of the equipment owned by the company. The business was wound down over the next 4 years.

The property was also partly occupied by one of the deceased's child in their business from 20XX to 20XX as a sole trader and then by their company entity from DD MM 20XX to DD MM 20XX.

The deceased's spouse passed away on DD MM 20XX. Their 50% interest in the property passed to the deceased as the surviving joint tenant. Probate was not obtained because the estate was minor and uncomplicated.

After the death of the deceased's spouse, the property continued to be used to derive rent, predominately from an unrelated third party as well as from the deceased's child.

The deceased died on DD MM 20XX. The deceased's Will held that the property, as part of the rest and residual of the estate, was to be divided between their children in equal shares as tenants in common. You have provided a copy of the deceased's Will and probate documents with your application.

The property continued to be rented and was transferred to the executors of the deceased's estate pursuant to the Will on DD MM 20XX.

A relative engaged legal representation soon after the death of the deceased. Correspondence passed between their lawyers and the lawyers for the deceased's estate in relation to various claims. The claims in relation to their alleged entitlement to a share of the property were rejected by the estate. No settlement was able to be reached which resulted in the commencement of legal proceedings between the parties.

The proceedings are ongoing and have not been resolved. The proceedings delayed the sale of the property after the death of the deceased. The executors of the estate planned to sell the property and distribute the proceeds to the beneficiaries within the 2-year period but were prevented from doing so by the claim and the threat of injunction before the proceedings were commenced.

Court proceedings were commenced on DD MM 20XX. The executors of the deceased's estate have filed a defence. You have provided copies of the documents filed as part of the legal proceedings with your application.

The property was sold with vacant possession on DD MM 20XX. The proceeds of the sale of the property are held in a solicitor's trust account pending resolution of the proceedings. You have provided a copy of the contract of sale with your application.

At the dates of the deceased's death and their late spouse's death, the companies:

•                     Each, and in aggregate had less than $2 million in gross revenue,

•                     Each, and in aggregate had less than $6 million maximum net assets,

•                     Each, as entities connected to the deceased and their late spouse, plus their CGT assets, were, in aggregate, less than $6 million maximum net assets.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

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 subsection 152-40(1)

Income Tax Assessment Act 1997 paragraph 152-47(2)(a)

Income Tax Assessment Act 1997 section 152-80

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 section 152-105

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 paragraph 328-125(2)(b)

Income Tax Assessment Act 1997 subsection 328-130(1)

Reasons for decision

Question 1

Detailed reasoning

The rules for dealing with a deceased individual's property for the purposes of applying the small business concessions are set out in section 152-80 of the ITAA 1997. Where a CGT event happens to an interest in an asset within 2 years of an individual's death, the capital gain can be reduced or disregarded in the same way that the deceased individual would have been entitled to if the CGT event had happened immediately before their death.

A CGT event must happen in relation to the CGT asset within 2 years of the individual's death under paragraph 152-80(1)(d) of the ITAA 1997. The Commissioner has the discretion to extend the 2-year time limit under subsection 152-80(3) of the ITAA 1997.

The Commissioner has considered the following factors in determining whether to exercise the discretion to extend the 2-year time limit:

•                     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 grant the extension,

•                     whether it would be prejudicial to the Commissioner to grant further time. The absence of prejudice is not enough to justify the granting of the extension,

•                     whether the decision will unsettle people other than the Commissioner or unsettle established practices,

•                     whether it is fair to people in similar positions and the wider public interest,

•                     whether there is any mischief involved, and

•                     the consequences of granting the extension.

Application to your circumstance

In this case, the deceased individual passed away on DD MM 20XX. The time limit expired on DD MM 20XX, being 2 years after the death of the deceased. The property was sold on DD MM 20XX. As the relevant asset was not disposed of within the 2-year period, you will only be able to reduce or disregard the capital gain if the Commissioner grants an extension of the time limit.

The prolonged delay in disposing of the property was due to legal proceedings which ensued as a result of the deceased's relative disputing the deceased's Will. As the dispute related to the ownership of the property in particular, the estate was not able to deal with the property within the 2-year time limit. The dispute is ongoing and the proceeds from the sale of the property are currently held in a solicitor's trust account pending the outcome of court proceedings.

The request for an extension to the time limit was received approximately 2 years and 6 months after the 2-year period ended. As the request has been received outside the 2-year period, there may be some prejudice on the Commissioner. The extension requested is for approximately 7 months outside of the 2-year period, which is not excessive. The circumstances of the case and explanation for the delay support the case for an extension of the time limit.

There is an acceptable explanation to support the extension request and it is fair and equitable in the circumstances to grant the extension. The decision to grant the extension is fair to those in similar positions and the wider public interest. There does not appear to be any mischief involved and no ill consequences that would result from the extension being granted.

Having considered these factors and your circumstances, the Commissioner will exercise the discretion in subsection 152-80(3) to extend the time limit to DD MM 20XX to allow you to reduce or disregard any capital gains resulting from the sale of the deceased's property.

Question 2

Detailed reasoning

Basic conditions

To access the small business CGT concessions, you must meet the basic conditions for relief under section 152-10 of the ITAA 1997. You may reduce or disregard a capital gain you make under Division 152 of the ITAA 1997 if a CGT event happens in related to a CGT asset of yours in an income year and the event would have resulted in a gain. You must be a small business entity for the income year or satisfy the maximum net asset value test. The asset must also meet the active asset test.

Maximum net asset value test

The maximum net asset value test is contained under section 152-15 of the ITAA 1997. The test is satisfied if, just before the CGT event, the sum of the following amounts does not exceed $6 million:

•                     The net value of the CGT assets you own,

•                     The net value of the CGT assets of any entities connected with you,

•                     The net value of the CGT assets of any affiliates of yours or entities connected with your affiliates.

Active asset test

The active asset test is contained in section 152-35 of the ITAA 1997. The test is satisfied where an asset is owned for more than 15 years, and the asset was an active asset for a total of at least 7.5 years in the test period. The test period begins when the asset was acquired and ends at the CGT event.

Under subsection 152-40(1) of the ITAA 1997, a CGT asset is an active asset if it is owned and used, or held ready for use, by you, your affiliate, or another entity that is connected with you in the course of carrying on a business that is carried on, whether alone or in partnership.

Affiliates

The meaning of 'affiliates' is contained in subsection 328-130(1) of the ITAA 1997.A company is an affiliate of yours if it acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the company. Paragraph 152-47(2)(a) of the ITAA 1997 also provides that spouses are taken to be affiliates.

Entities 'connected with' you

The meaning of 'connected with' an entity is contained in section 328-125 of the ITAA 1997. An entity is connected with another entity if either entity controls the other entity, or if both entities are controlled by the same third entity.

Whether an entity has direct control of a company is set out in paragraph 328-125(2)(b) of the ITAA 1997. An entity controls a company if it owns equity interests in the company that carries between them the right to exercise a percentage that is at least 40% of the voting power in that company.

15 year-exemption

The 15-year exemption for individuals is set out under section 152-105 of the ITAA 1997. You can disregard any capital gain arising from a CGT event if the following conditions are satisfied:

•                     The basic conditions under Subdivision 152-A are satisfied,

•                     The CGT asset was continuously owned by the individual for the 15-year period ending just before the CGT, and

•                     At the time of the CGT event, the individual was 55 or over and the event was in connection to their retirement, or they were permanently incapacitated.

For CGT events that occur after the individual's death, paragraph 152-80(2)(a) of ITAA 1997 amends the last condition so that there is no requirement for the event to happen in connection with the individual's retirement.

Small business concessions and deceased estates

You may apply the small business concessions to a capital gain that arises after the death of an individual, provided that certain conditions are met.

The rules for when a CGT event happens to an asset within 2 years of an individual's death are contained in section 152-80 of the ITAA 1997. If a CGT asset forms part of the estate of a deceased individual and it devolves to the legal personal representative (e.g. the executor of an estate) of the deceased, the executor is entitled to reduce or disregard a capital gain under Division 152 of the ITAA 1997 in the same way that the deceased would have been entitled to immediately before their death.

The CGT event must happen within 2 years of the individual's death, unless the Commissioner extends this time limit using the discretion under subsection 152-80(3) of the ITAA 1997.

Application to your circumstance

We have applied the basic conditions and the conditions for the 15-year exemption as though the CGT event occurred immediately before the deceased's death.

The basic conditions are met as the 50% interest in the property is a CGT asset and a CGT event occurred when the property was sold on DD MM 20XX. You have advised that the deceased's maximum net asset value was less than $6 million. The deceased would have therefore met the MNAV test.

The property also meets the active asset test, as it was owned by the deceased for approximately XX years and was an active asset for approximately XX years during this time. The companies that operated the business which were all owned by the deceased and their late spouse are considered to be entities 'connected with' the deceased. This is because the deceased controlled the companies by having a percentage of over 40% of the voting power in each company. Furthermore, the companies owned only by the deceased's late spouse are considered to be the deceased's affiliates, as it could be reasonably expected that the companies acted in accordance with the deceased's directions or wishes, or in concert with the deceased. The deceased and their late spouse are also taken to be affiliates as they are spouses.

The deceased was over 55 years old when they passed away and they held a 50% interest in the property for over 15 years.

The deceased would have therefore been entitled to apply the 15-year exemption to reduce or disregard the capital gain if the event had happened immediately before their death, because:

•                     They met the basic conditions,

•                     Their 50% interest in the property was held for over 15 years, and

•                     They were over 55 at the time that the property was disposed.

You are the executor of the estate for the deceased individual. The property formed part of the estate and devolved to you as the legal personal representative of the deceased. As discussed above, the deceased would have been entitled to apply the 15-year exemption to the gain if the CGT event had occurred immediately before their death. You will therefore be able to apply the small business concessions to reduce or disregard the capital gain given that the Commissioner has extended the2-year time limit in Question 1.

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