Edited version of your written advice

Authorisation Number: 1012730389656

Ruling

Subject: CGT - small business concessions - 15-year exemption

Question

Will you be able to apply the 15-year exemption to shares you inherited from a deceased estate?

Answer:

Yes.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You acquired X shares in Company X in 199X.

Your spouse acquired Y shares in Company X on in 199X.

There is a third shareholder in Company X who owns Z shares.

In 201X, your spouse passed away, they were over 55 years of age. Their shares in Company X transferred to you under their will.

You now hold XY shares in Company X.

You state that your spouse passed the maximum net asset value test.

You state that more than 80% of the assets Company X holds are active assets.

You wish to dispose of a number of the deceased's shares to the third shareholder of Company X.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152A,

Income Tax Assessment Act 1997 Subsection 152-40(3),

Income Tax Assessment Act 1997 Subsection 152-40(3B) and

Income Tax Assessment Act 1997 Subdivision 152-B.

Reasons for decision

Detailed Reasoning

According to the Advanced Guide to Capital Gains Tax Concessions for Small Business 2014-15, if you are a beneficiary of a deceased estate you may be eligible for the concessions to the same extent that the deceased would have been just prior to their death.

You will be eligible for the concessions where the CGT event happens within two years of the individual's death.

The 15-year exemption can be chosen if the deceased had met the requirements, except that it is not necessary for the CGT event to have happened in relation to their retirement.

In your case, you have inherited shares in a company from your deceased spouse. We must therefore examine whether the deceased would have qualified for the small business CGT concessions and more specifically the 15-year exemption.

Basic conditions

To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'.

The basic conditions are contained in subdivision 152A of the Income Tax Assessment Act 1997 (ITAA 1997).

STEP 1

You must first satisfy one of the following:

• you are a small business entity

• you do not carry on business (other than as a partner) but your asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you (passively held assets)

• you are a partner in a partnership that is a small business entity, and the CGT asset is:

• an interest in a partnership asset (partnership assets), or

• an asset you own that is not an interest in a partnership asset (partner's assets)

• you satisfy the maximum net asset value test.

STEP 2

The asset in question must satisfy the active asset test.

STEP 3

Where the CGT asset is a share in a company or interest in a trust, one of these additional basic conditions must be satisfied just before the CGT event:

• the entity claiming the concession must be a CGT concession stakeholder in the company or trust, or

• CGT concession stakeholders in the company or trust together have a small business participation percentage in the interposed entity of at least 90%.

In your case, you have met the requirements of Step 1 of the basic conditions as the deceased satisfied the maximum net asset value test.

Active assets

A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

Subsection 152-40(3) of the ITAA 1997 determines that a share in a company that is an Australian resident can also be an active asset. This is provided that the total of:

• the market values of the active assets of the company or trust; and

• the market value of any financial instruments of the company or trust that are inherently connected with a business that the company or trust carries on; and

• any cash of the company or trust that is inherently connected with such a business;

is 80% or more of the market value of all of the assets of the company or trust.

Subsection 152-40(3B) of the ITAA 1997 provides that the 80% test will taken to have been met where breaches of the threshold are only temporary in nature and in circumstances where it is reasonable to conclude that the 80% threshold has been passed.

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 of 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 7.5 years during the test period.

The test period begins when you acquired the asset and ends at the CGT event date.

In your case, the shares that the deceased held are able to be considered active assets because the company satisfies the 80% test. The deceased also satisfied the active asset test.

Therefore, you have met the requirements of Step 2 of the basic conditions.

CGT concession stakeholder

An individual is a CGT concession stakeholder of a company or trust if they are a significant individual.

An individual will be a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%.

In your case, the deceased held 50% of the shareholding of the company. He was considered a significant in the company and consequently a CGT concession stakeholder.

Therefore, you have met the requirements of Step 3 of the basic conditions.

15-year exemption

Subdivision 152-B of the ITAA 1997 provides a small business 15 year exemption as part of the capital gains tax (CGT) small business relief provisions. If you qualify for the small business 15-year exemption, the capital gain is entirely disregarded and it is unnecessary to apply any other concessions.

If you are an individual, you can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

(a) you satisfy the basic conditions

(b) you continuously owned the CGT asset for the 15 year period ending just before the CGT event,

(c) if the CGT asset is a share in a company or an interest in a trust, the company or trust had a significant individual for a total of at least 15 years, and

(d) either:

(i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement, or

(ii) you are permanently incapacitated at the time of the CGT event.

In your case, the deceased would have qualified for the 15-year exemption if the event occurred in connection with their retirement.

Therefore, as a beneficiary to the deceased estate you are eligible for the 15-year exemption on the disposal of the inherited shares, if the disposal is made within two years of the deceased's date of death.