Edited version of private ruling

Authorisation Number: 1011806269319

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: CGT discount - CGT small business concessions

Question 1

In relation to the disposal of the property is the Estate entitled to access the 50% capital gains tax (CGT) discount under Subdivision 115-A of the Income Tax Assessment Act 1997 (ITAA 1997)

Answer

Yes.

Question 2

Will the Estate be able to apply the CGT small business 50% reduction under Subdivision 152-C of the ITAA 1997 if the property is sold within 2 years of the date of death of the Deceased?

Answer

Yes.

Question 3

Will the Estate be able to apply the CGT small business retirement exemption under Subdivision 152-D of the ITAA 1997 up to the Deceased's lifetime limit if the property is disposed of within 2 years of her date of death?

Answer

Yes.

Question 4
Will the Estate be able to access the CGT small business concessions contained within Division 152 if the property is disposed of after two years from the date of death?

Answer

No, unless you apply for and the Commissioner grants an extension of time under subsection 152-80(3).

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Relevant facts and circumstances

You advise that the Deceased operated a small business.

The property was purchased after 1985.

Several years later, the Deceased ceased operating the business and leased the property.

The Deceased later passed away. The property was transferred to the Estate which continued with the lease arrangement.

The property was held by the Deceased for less than 15 years and used within the business for more than half of that time.

You advise that just before their date of death the net value of the Deceased's assets was well less than $6 million.

You advised that you were not aware how much remained in relation to the Deceased's CGT retirement exemption limit as at the date of death.

In relation to the application checklist in which you indicated that you were not reasonably certain of the facts you set out, you state that this only applies to the final date of disposal and the exact date on which the Deceased's business ceased to operate.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 104-10

Income Tax Assessment Act 1997, section 115-10

Income Tax Assessment Act 1997, section 115-15

Income Tax Assessment Act 1997, section 115-20

Income Tax Assessment Act 1997, section 115-25

Income Tax Assessment Act 1997, subsection 115-30(1)

Income Tax Assessment Act 1997, paragraph 115-100(a)

Income Tax Assessment Act 1997, Division 152

Income Tax Assessment Act 1997, Subdivision 152-A

Income Tax Assessment Act 1997, Subdivision 152-B

Income Tax Assessment Act 1997, Subdivision 152-C

Income Tax Assessment Act 1997, Subdivision 152-D

Income Tax Assessment Act 1997, Subdivision 152-E

Income Tax Assessment Act 1997, section 152-10

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

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

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 152-80(2)

Income Tax Assessment Act 1997, subsection 152-80(2A)

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

Income Tax Assessment Act 1997, section 152-305

Income Tax Assessment Act 1997, paragraph 152-305(1)(b)

Income Tax Assessment Act 1997, section 152-15

Income Tax Assessment Act 1997, section 152-20

Income Tax Assessment Act 1997, section 152-25

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Note, all subsequent legislative references are to the ITAA 1997 unless otherwise states.

Question 1

A discount capital gain is one that meets the conditions of sections 115-10, 115-15, 115-20 and 115-25. The conditions are as follows:

· the entity making the gain is a trust;

· the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999;

· the entity acquired the asset at least 12 months before the CGT event, and

· the entity did not choose to use the indexation method.

Item 3 in the table contained within subsection 115-30(1) provides that for the purposes of section 115-25 and the 12 month ownership requirement the commencement date for the estate of a deceased individual will be the date on which the deceased acquired the asset.

Application to the Estate's circumstance
You advise that the Estate satisfies all these conditions. In particular it satisfies section 115-25 because the property will have been acquired by the Deceased at least 12 months before the happening of the proposed A1 CGT event (ie. the disposal of the property).

It follows that the Estate will make a discount capital gain upon disposal. Since the rulee is a trust estate the discount percentage allowed under paragraph 115-100(a) is 50%.

Question's 2 & 3

CGT event happens within 2 years of individual's death
Where an asset forms part of the estate of a deceased individual, section 152-80 provides that where the deceased individual would have been entitled to access the small business CGT concessions immediately before his or her death, then the trustee of the deceased estate will be eligible to access these concessions if a CGT event happens in relation to the CGT asset within 2 years of the individual's death.

Under Division 152 four different types of concession may be accessed if the basic conditions in Subdivision 152-A are satisfied. These are:

(a) the 15 year exemption (Subdivision 152-B)

(b) the 50% reduction (Subdivision 152-C)

(c) the retirement concession (Subdivision 152-D)

(d) the roll over (Subdivision 152-E)

Note, where the asset being disposed of has not been owned for 15 years the Subdivision 152-B concession cannot apply. Further, where the taxpayer is deceased, the relevant business has ceased to operate and a replacement asset will not be acquired, the Subdivision 152-E concession will not apply.

50% reduction (Subdivision 152-C)
After applying the general 50% CGT discount (as per Question 1) the remaining gain is reduced by a further 50% if the basic conditions in Subdivision 152-A are satisfied for the gain. These appear in section 152-10.

Section 152-10 contains the following basic conditions:

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

(b)    the event would (apart from Division 152) have resulted in a gain.

(c)    at least one of the following applies:

(i)   the taxpayer is a small business entity for the income year

(ii)  the taxpayer satisfies the maximum net asset value test in section 152-15

(iii) the taxpayer was a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership

(iv) the conditions mentioned in subsection 152-10(1A) or subsection 152-10(1B) are satisfied in relation to the CGT asset in the income year

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

Application to the Estate's circumstance

Basic condition (a):

If the Estate disposes of the property CGT event A1 in section 104-10 relating to the disposal of a CGT asset will happen and this condition will be satisfied.

Basic condition (b):

You advise that the above A1 CGT event will result in a capital gain from the disposal of the property, thus satisfying this condition.

Basic condition (c):

The maximum net asset value test in section 152-15 requires that the total net value of CGT assets owned by the Deceased, entities connected with the Deceased, and any affiliates of the Deceased or entities connected with these affiliates did not exceed $6 million just before the CGT event that results in the capital gain for which the concessions are sought.

You have advised that the Deceased would have satisfied this test as at the date of death with net assets valued well below $6 million.

Basic condition (d):

The active asset test in section 152-35 requires the CGT asset that gave rise to the capital gain to be an active asset for a particular period. Where the asset is held for less than 15 years the requirement is that it be an active asset for at least half the period of ownership.

Section 152-40 provides the meaning of active asset. The property owned by the Deceased will be an active asset at a time if, at that time, the property was used or held ready for use by the Deceased, an affiliate of the Deceased, or an entity connected with the Deceased, in the course of carrying on a business.

In this case, the Deceased commenced operating a business as a sole trader. A property was acquired and used in the business. The property was later leased until the date of death.

As the property was used in the course of carrying on the business it satisfies the meaning of active asset requirement in section 152-40. As it was used for this purpose for greater than half the period of ownership it also meets the active asset test in section 152-35.

Summary for small business 50% reduction
As the Deceased would have satisfied all of the basic conditions if the property had been disposed of immediately before their death, they would have been able to apply the 50% reduction to any capital gain resulting from such a sale.

It follows that the Estate is also entitled to apply this 50% reduction to the capital gain remaining after having taken into account the Subdivision 115-A 50% CGT discount.

Retirement concession (Subdivision 152-D)
Subsection 152-80(2) provides that a person mentioned in subsection 152-80(2A) is entitled to reduce or disregard a capital gain in the same way as the deceased individual. Subsection 152-80(2A) includes the trustee of a trust.

It follows that for the purposes of the retirement concession under Subdivision 152-D the trustee of a deceased estate is treated as an individual. The trust conditions under section 152-325 need not be addressed.

Accordingly, the Estate will be able to apply the retirement concession and exclude any capital gain remaining after subtracting the 50% CGT discount and 50% CGT small business reduction provided it meets the conditions outlined in sections 152-305, 152-315 and 152-320.

Section 152-305 requires that the basic conditions under Subdivision 152-A are satisfied for the gain. Note that for a trust estate, section 152-80 disregards the requirement under paragraph 152-305(1)(b) regarding contributing an amount to a complying superannuation fund.

Section 152-315 addresses choosing the amount of capital gain to be disregarded. It requires that the taxpayers CGT retirement exemption limit is not exceeded and that the chosen CGT exempt amount must be specified in writing.

Section 152-320 provides the meaning of CGT retirement exemption limit. It provides that the taxpayer's 'limit at a time is $500,000 reduced by the CGT exempt amounts of CGT assets specified in choices previously made by or for the taxpayer under this Subdivision.'

Application to the Estate's circumstance
For the purposes of section 152-305 we have already established that the Estate meets the requirements of Subdivision 152-A.

You advise that you are not certain as to whether the Deceased had previously used any portion of the CGT retirement exemption limit. Therefore, with the proviso that this $500,000 maximum limit is not exceeded the operation of section 152-80 and Subdivision 152-D are such that the Estate will be entitled to choose to disregard any amount of capital gain remaining after the 50% CGT discount and 50% small business reductions have been taken into account.

Question 4

The operation of section 152-80 is such that unless, in terms of subsection 152-80(3) the Commissioner agrees to extend the time limit in paragraph 152-80(2)(d), the CGT small business concessions will only apply if the CGT event happens in relation to the relevant CGT asset within 2 years of the individual's death.

In determining whether the discretion to allow further time will be exercised the Commissioner generally considers the following factors:

· evidence of an acceptable explanation for the period of the extension requested, and whether it would be fair and equitable to provide such an extension under those circumstances

· Prejudice to the Commissioner which may result from the additional time being allowed

· 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.

Application to the Estate's circumstance
A decision as to whether this extension will be granted will only be made once the facts are clear and a full explanation has been provided.

Note that the Subdivision 115-A 50% CGT discount is not impacted upon by these Division 152 limitations. Therefore, that discount would still be available if the property is sold after the period ending 2 years from the date of death.