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Ruling

Subject: Capital gains tax - Extension of time to apply section 152-80

Question 1

Are the small business Capital Gains Tax (CGT) concessions available to the spouse of the deceased taxpayer by operation of section 152-80 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

If so will the Commissioner allow an extension of the two year time limit as provided for in sub-section 152-80(3) of the ITAA 1997?

Answer

Not applicable.

This ruling applies for the following periods:

1 July 2008 to 30 June 2009

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

The scheme commences on:

1 July 2008

Relevant facts and circumstances

The taxpayer and her husband acquired an asset prior to 20 September 1985. The husband passed away after 20 September 1985. Circumstances impacted upon the speed with which the taxpayer could turn to the matter of disposing of the asset.

The taxpayer has conducted prolonged negotiations in relation to the sale of the asset. Whilst showing interest, none of the parties is currently in a position to purchase. Attempts to sell the asset have been hampered by uncertainty over certain issues which remain unresolved.

The taxpayer wants to apply the provisions of section 152-80 of the ITAA 1997 and further, as the two years to do so have expired, she is also seeking an extension of time to do so as provided for in sub-section 152-80(3).

Relevant legislative provisions

Section 104-10 Income Tax Assessment Act 1997

Section 128-50 Income Tax Assessment Act 1997

Section 152-10 Income Tax Assessment Act 1997

Section 152-80 Income Tax Assessment Act 1997

Reasons for decision

Unless otherwise specified, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997.

When a taxpayer acquires a CGT asset, including acquisition by inheritance, they are potentially liable for tax on any capital gain on that asset when a CGT event subsequently happens to it. If a CGT asset is owned by joint tenants and one of them dies, the survivor is taken to have acquired the deceased individual's interest in the asset on the day they died under subsection 128-50(2).

In some instances, a taxpayer can reduce the capital gain made from a CGT event by applying the small business CGT concessions. Section 152-80 potentially extends the availability of the small business CGT concessions to an asset held by a legal personal representative or beneficiary of a deceased estate, to the extent that the deceased would have been entitled to the concessions, if a CGT event happens to the asset within two years of the death.

Sub-section 152-80(1) details the circumstances in which the section applies. It says at paragraph 152-80(1)(c) that the section applies if "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 (i.e. Division 152) if a CGT event had happened in relation to the CGT asset immediately before his or her death."

Sub-section 152-80(2) states, amongst other things, that a person "is entitled to reduce or disregard a capital gain under this Division in the same way as the deceased individual would have been entitled to…"

It follows that in order for the taxpayer to qualify for the concession in section 152-80 - and, therefore, the extension of time in sub-section 152-80(3) - it is necessary that the deceased taxpayer would have been entitled to disregard the relevant capital gain "under this Division" that is, Division 152. In other words, the concession in 152-80 only applies if - in the absence of the SB concessions or but for the SB concessions - the deceased taxpayer would have had a capital gain.

In order for the deceased to have been entitled to disregard a capital gain under Division 152, that is to qualify for the small business concessions, they would have needed to have met the basic conditions in section 152-10 that must be satisfied in order to apply any of the small business CGT concessions. In order to do so, paragraph 152-10(1)(b) states that it is a requirement that "the event would (apart from this Division) have resulted in the gain."

If an asset was acquired before 20 September 1985, then any capital gain or capital loss on its disposal is disregarded in accordance with paragraph 104-10(5)(a). As the property in question was acquired prior to 20 September 1985, its disposal would have been exempted from the CGT provisions by the operation of paragraph 104-10(5)(a) and would therefore not have resulted in a gain for the purposes of paragraph 152-10(1)(b). It follows that the basic conditions for the small business concessions would not have been met, paragraph 152-80(1)(c) would not have been satisfied and access to the concessions under Division 152 denied.

Application to your circumstances

The fifty per cent share of the asset acquired before 20 September 1985 would not have qualified for the small business CGT concessions if the deceased had disposed of the asset immediately before his death. There would have been no capital gain for him to reduce or disregard under paragraph 152-80(1)(c), as it would have been disregarded in accordance with paragraph 104-10(5)(a).

Consequently, his spouse will not qualify for section 152-80 including, necessarily, sub-section 152-80(3). If the taxpayer's husband had in fact had an assessable capital gain, his wife would have been entitled to apply the concessions but as there would have been no assessable capital gain to him, he didn't need the SB concessions to avoid a capital gain. Therefore, any capital gain on his share of the asset will not be exempt in the hands of his wife as the beneficiary of his estate.

However, if the individual who died acquired their interest in the asset before 20 September 1985, subsection 128-50(4) states that the first element of the cost base and reduced cost base of the interest the survivor is taken to have acquired is the market value of the interest on the day the individual died. As the deceased had acquired his interest before 20 September 1985, the first element of the cost base in the hands of his wife is the market value of the interest on the day that he died.

Any capital gain or loss on disposal would then be determined by the extent to which the consideration received on disposal in respect of his interest varied from the market value at the date of death. The spouse's own original interest will retain its pre-CGT exemption.