Edited version of your written advice

Authorisation Number: 1012988518854

Date of advice: 23 March 2016

Ruling

Subject: Capital gains tax-small business concessions-15 year exemption

Question 1:

Will the executors be required to account for any capital gain made upon the sale of the property?

Answer:

Yes

Question 2:

Is the property an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes

Question 3:

Is the estate of the deceased entitled to claim the small business capital gains tax (CGT) 15-year exemption to reduce the capital gain on the disposal of the property under Division 152 of the ITAA 1997?

Answer:

Yes

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commenced on:

1 July 2014

Relevant facts

The deceased was born on XXXX.

The deceased passed away on XXXX.

On XXXX the deceased's spouse died and their estate devolved to the deceased which included the farming property.

The deceased's spouse owned and operated the property as a farming business until their death.

For a period of more than 7.5 years the deceased continued to operate farming activity on the property.

The deceased disposed of all the livestock to the farm.

The deceased entered into a leasing agreement for the use of the property.

The leasing agreement ceased when the property was sold by the executors of the estate.

The deceased owned the property for more than 15 years.

Probate for the deceased estate was granted.

Under the will for the deceased, the executor has the power to sell, lease or exchange or otherwise dispose of assets in the deceased estate on such terms as they consider it expedient as though they were absolute beneficial owners.

The net value of the CGT assets held by the estate for the purposes of the maximum net asset value test is under six million dollars.

The deceased was not connected or affiliated with any other entities.

The sale of the property resulted in a capital gain.

The sale occurred within two years of the deceased's death.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Paragraph 108-5(1)(a)

Income Tax Assessment Act 1997 Subsection 128-15(2)

Income Tax Assessment Act 1997 Subsection 128-15(3)

Income Tax Assessment Act 1997 Section 152-10

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

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

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Paragraph 152-35(1)(a)

Income Tax Assessment Act 1997 Paragraph 152-35(1)(b)

Income Tax Assessment Act 1997 Subsection 152-40(1)

Income Tax Assessment Act 1997 Subsection 152-40(4)

Income Tax Assessment Act 1997 Section 152-80

Income Tax Assessment Act 1997 section152-105

Reasons for decision

Capital gains tax provisions

Division 128 of the ITAA 1997 deals with the effect of death, and sets out what happens when a CGT asset that a deceased person owned just before their death devolves to their legal personal representative, or passes to a beneficiary in their estate.

Subsection 128-15(2) of the ITAA 1997 states that the legal personal representative or beneficiary is taken to have acquired the asset on the day the deceased person died. Any capital gain or capital loss that the legal personal representative makes if the assets passes to a beneficiary is disregarded (subsection 128-15(3) of the ITAA 1997).

Administration of a deceased estate

Taxation Ruling IT 2622 discusses the concept of present entitlement during the stages of the administration of a deceased estate. Paragraph 2 of IT 2622 explains the processes in the administration of a deceased estate when it states that:-

2. On the death of a taxpayer, the property of the deceased taxpayer passes to his or her estate, legal control over which is exercised by an executor or administrator. The executor or administrator, in effect, steps into the shoes of the deceased and winds up the deceased's personal affairs. An executor of a deceased person who leaves a will must obtain probate of the will. This is the official proving of the will and provides the executor with authority to deal with the estate. When probate has been granted, the executor is free to call up the deceased's assets and liabilities, and pay the debts, funeral and testamentary expenses. After these matters have been attended to, the executor distributes the property of the deceased to the beneficiaries of the estate.

In the present circumstance, a review of the information provided indicates the property was acquired by legal personal representative (the executors) on the day the deceased passed away. The executors under the will were given powers to dispose of assets in the estate as though they were absolute beneficial owners of the property. In this case, the property was disposed of under the contract of sale by the executors.

Therefore as explained at Paragraph 9 of IT 2622 that, while the administration of a deceased estate is still incomplete the income of the estate is taxed to the trustee as income to which no beneficiary is presently entitled.

Small Business Concessions

The Advanced Guide to Capital Gains Tax Concessions for Small Business 2014-15, provides that where you are a beneficiary of the deceased's estate, a legal personal representative (executor), or a surviving joint tenant you will be eligible for the 15-year exemption to the same extent that the deceased would have been just prior to the death except that:

• the CGT event does not need to have been in connection with the retirement of the deceased

• the deceased needs to have been 55 or older immediately before their death, rather than at the time of the CGT event.

Note: the relevant legislation is outlined in section 152-80 of the ITAA 1997.

In this case, the property was disposed of within two years of the date of deceased's death and for the deceased estate to qualify for the small business CGT concessions the deceased must meet the basic conditions as contained in subdivision 152A of the ITAA 1997.

Small Business Concessions

Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business capital gains tax (CGT) concessions. These conditions are:

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

(b) the event would have resulted in a 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

(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 or

(iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 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 of the ITAA 1997.

Basic condition (a)

This condition requires a CGT event to happen in relation to your CGT asset in an income year. The asset in question is real estate (the property). A CGT asset includes any kind of property (paragraph 108-5(1)(a) of the ITAA 1997) and therefore the property is a CGT asset. The relevant CGT event will be the disposal of the property, which will cause CGT event A1 to happen (section 104-10 of the ITAA 1997).

As the CGT event has happened in relation to a CGT asset of the deceased in the income year, this condition will be satisfied.

Basic condition (b)

The sale of the property, that is, the CGT event, did result in the capital gain, and therefore this condition will be satisfied.

Basic condition (c) 

You satisfy the maximum net asset value test if the total net value of CGT assets owned by certain entities does not exceed $6 million just before the CGT event that results in the capital gain for which the concessions are sought.

In considering whether the deceased would have passed the maximum net asset value test, the executors have advised that their estate was worth less than $6 million and that the deceased had no affiliates or connected entities. On this basis, the test is satisfied and the first step of meeting the basic conditions is completed.

Basic condition (d) 

This condition requires that the active asset test in section 152-35 of the ITAA 1997 is satisfied. In your case, the active asset test requires the CGT asset that gave rise to the capital gain to be an active asset for at least half the time of ownership or for 7 and 1/2 years if the asset is owned for more than 15 years.

Active Asset

For a CGT asset of a business to be an active asset for the purposes of Division 152 of the ITAA 1997, it must firstly satisfy one of the positive tests in subsection 152-40(1) of the ITAA 1997, and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under subsection 152-40(1) of the ITAA 1997 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.

In this case, the deceased owned the property for a period of more than 15 years. In considering whether the property was an active asset of the deceased we need to consider the use of the property over the period of time the property was held.

In this case, the property was used for a dual purpose; however, the property for a period of more than 7.5 years was used to derive business income from the farming activity and as such is an active asset unless excluded under subsection 152-40(4) of the ITAA 1997. In the deceased's case none of the exclusions apply to the property.

Therefore basic condition (d) is satisfied.

Additional Conditions to be eligible for the 15 year small business exemption

As stated above in addition to the basic conditions, to access the 15 year small business concession for CGT purposes you must also satisfy the following two conditions:

Firstly, you must have owned the active asset for a period greater than 15 years. The deceased satisfies this condition.

Secondly, you must be either over 55 year of age and retiring or permanently incapacitated at the time of the CGT event.

At the time immediately before the CGT event the deceased would have been over 55 years of age and able to access the 15 year small business exemption.

Accordingly the executors can therefore access the small business concessions to reduce the assessable capital gain resulting from the sale of the deceased's property.