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Ruling

Subject: Deceased estate - small business CGT concessions

Question 1:

Under paragraph 152-80(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) would the share of the land that your parent acquired prior to 19 September 1985 have qualified for the small business capital gains tax (CGT) concessions if they had disposed of the asset (the land) immediately before their death?

Answer: No.

Question 2:

Under paragraph 152-80(1)(c) of the ITAA 1997 would the share of the land that your parent acquired on the death of their husband after 19 September 1985 have qualified for the small business CGT concessions if they had disposed of the asset (the land) immediately before their death?

Answer: Yes.

Question 3:

Will the Commissioner exercise his discretion under subsection 152-80(3) of the ITAA 1997 and allow extra time for the beneficiaries to obtain the small business CGT concessions in relation to the land your parent acquired from their husband upon his death?

Answer: Yes.

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

More than two years after the death of your parent you entered into a Deed to partition land which was held as tenants in common in equal shares.

The effect of the Deed was such that properties would be transferred from joint ownership of the partners to sole ownerships.

Some of the land was acquired by your parent before 19 September 1985 and the remainder of the land was acquired by your parent when their husband died after 19 September 1985.

The land was used to carry on a business from purchase until the land was leased several years ago.

The land was used in the business for more than half the period of ownership.

The business undertaken by your parent had an aggregated annual turnover of less than $x million.

Due to the complicated nature of the will and discussions in reaching final agreements, it took more than two years to sign the deed.

This ruling is in respect to the CGT event resulting from the Deed of Partition.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 152-80(3).

Income Tax Assessment Act 1997 Subsection 128-50(2).

Income Tax Assessment Act 1997 Section 152-80.

Income Tax Assessment Act 1997 Section 152-10.

Income Tax Assessment Act 1997 Division 152.

Income Tax Assessment Act 1997 Section 152-15.

Income Tax Assessment Act 1997 Section 152-35.

Income Tax Assessment Act 1997 Subsection 152-80(1).

Income Tax Assessment Act 1997 Subsection 152-80(2).

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

Income Tax Assessment Act 1997 Paragraph 104-10(5)(a).

Income Tax Assessment Act 1997 Paragraph 152-10(1)(b).

Income Tax Assessment Act 1997 Section 152-40.

Income Tax Assessment Act 1997 Subsection 152-35(1).

Income Tax Assessment Act 1997 Subsection 152-35(2).

Income Tax Assessment Act 1997 Subsection 152-80(2A).

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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, 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

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

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) of the ITAA 1997 .

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 of the ITAA 1997 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.

Section 152-10 of the ITAA 1997 contains the basic conditions to be satisfied to qualify for the small business CGT concessions. These conditions are:

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

(b) the event would (apart from Division 152 of the ITAA 1997) have resulted in the gain

(c) at least one of the following applies:

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

(ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997, or

(iii) you are 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.

(d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Subsection 152-80(1) of the ITAA 1997 details the circumstances in which the section applies. It says at paragraph 152-80(1)(c) of the ITAA 1997 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) of the ITAA 1997 if a CGT event had happened in relation to the CGT asset immediately before his or their death'.

Subsection 152-80(2) of the ITAA 1997 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 of the ITAA 1997 - and, therefore, the extension of time in subsection 152-80(3) of the ITAA 1997 - it is necessary that the deceased taxpayer would have been entitled to disregard the relevant capital gain 'under this Division' that is, Division 152 of the ITAA 1997.

In order for the deceased to have been entitled to disregard a capital gain under Division 152 of the ITAA 1997, that is to qualify for the small business concessions, they would have needed to have met the basic conditions in section 152-10 of the ITAA 1997 (see above) 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) of the ITAA 1997 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) of the ITAA 1997.

Question 1

The share of the land that your parent acquired prior to 19 September 1985 would not have qualified for the small business CGT concessions if they had disposed of the asset (the land) immediately before their death. There would have been no capital gain for their to reduce or disregard under paragraph 152-80(1)(c) of the ITAA 1997, as it would have been disregarded in accordance with paragraph 104-10(5)(a) of the ITAA 1997.

Consequently, you will not qualify for section 152-80 of the ITAA 1997 including, necessarily, subsection 152-80(3) of the ITAA 1997 in relation to the share of land that your parent acquired before 19 September 1985.

As the property in question was acquired prior to 19 September 1985, its disposal would have been exempted from the CGT provisions by the operation of paragraph 104-10(5)(a) of the ITAA 1997 and would therefore not have resulted in a gain for the purposes of paragraph 152-10(1)(b) of the ITAA 1997. It follows that the basic conditions for the small business concessions would not have been met, paragraph 152-80(1)(c) of the ITAA 1997 would not have been satisfied and access to the concessions under Division 152 of the ITAA 1997 denied.

Question 2:

Basic Conditions

To qualify for the small business concessions provided in Division 152 of the ITAA 1997, a taxpayer must satisfy the basic conditions in section 152-10 of the ITAA 1997 (see above) as well as any other conditions that are specifically applicable to the particular concession claimed by the taxpayer.

Section 152-40 of the ITAA 1997 provides the meaning of active asset. An asset is an active asset at a time, if at that time, you own the asset and it is used or held ready for use by you, your affiliate or an entity connected with you.

Your parent acquired a share of the land on the date their husband died. Applying the basic conditions just before they died, apart from basic condition (a):

· the event would have resulted in a gain

· they were a small business entity

We will also need to determine if the land qualified as an active asset.

The active asset test in section 152-35 of the ITAA 1997 requires the CGT asset that gave rise to the capital gain to be an active asset for a particular period.

Subsection 152-35(1) of the ITAA 1997 provides that the active asset test is satisfied if:

· 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 the test period, or

· 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 test period.

The test period:

· begins when you acquired the asset, and

· ends at the earlier of

· the CGT event, and

· if the business ceased in the 12 months before the CGT event when the business ceased (subsection 152-35(2) of the ITAA 1997).

The asset does not need to be an active asset just before the CGT event.

The asset was an active asset for more than half of the period of ownership and would therefore qualify as an active asset.

You have also stated that your parent was a small business entity just before they died.

This basic conditions are satisfied.

For the share of the property that was acquired after 19 September 1985, your parent satisfies the basic conditions and would have been able to apply the small business concessions just prior to their death.

Subsection152-80(2) of the ITAA 1997 states that a person mentioned in subsection (2A) is entitled to reduce or disregard under Division 152 in the same way as the deceased would have been able to. Subsection 152-80(2A) of the ITAA 1997 includes beneficiaries of the deceased.

Some of the small business concessions would have been able to be applied (subject to limits and some further conditions) and therefore the individuals are also able to apply the concessions if the Commissioner allows further time.

Question 3:

Section 152-80 of the ITAA 1997 allows either the legal personal representative of an estate or the beneficiary to apply the small business CGT concessions in respect of the sale of the deceased's asset in certain circumstances.

Specifically, the following conditions must be met:

· the asset devolves to the legal personal representative or passes to a beneficiary, and

· the deceased would have been able to apply the small business concessions themselves immediately prior to their death, and

· a CGT event happens within two years of the deceased's death unless the Commissioner extends the time period in accordance with subsection 152-80(3) of the ITAA 1997.

In determining whether the discretion to allow further time would be exercised, the Commissioner has considered the following factors:

· evidence of an acceptable explanation for the period of the 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.

In this case, due to the complicated nature of the will and discussions in reaching final agreements, it took more than two years to sign the deed.

The Commissioner is able to apply an extension of time where there is a reasonable explanation for an extension.

Having considered the relevant facts, the Commissioner is able to apply his discretion under subsection 152-80(3) of the ITAA 1997 and allow a reasonable extension to the time limit. Allowing an extension is not prejudicial to the Commissioner in this case nor is it unfair to other people in similar positions.