Edited version of your written advice

Authorisation Number: 1013124388582

Date of advice: 16 November 2016

Ruling

Subject: Income tax - Capital gains tax - Small business relief - Maximum net asset value test

Client name

The Trustee for the Estate of the late Deceased

Question 1

Would the deceased have satisfied the maximum net asset value (MNAV) test in section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997) just prior to their death?

Answer

Yes.

Question 2

Will the Estate be able to apply the small business 50% active asset reduction in Subdivision 152-C of the ITAA 1997 to reduce the net capital gain if the Estate sells the share in the Company within two years of the death of the deceased?

Answer

Yes.

Question 3

Can the Estate choose to apply the small business retirement exemption in Subdivision 152-D of the ITAA 1997 to disregard all or part of the capital gain made on the sale of the share in the Company if the Estate sells the share within two years of the death of the deceased?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2017

The scheme commences on

1 July 2015

Relevant facts and circumstances

The deceased passed away on XX/XX/XXXX aged over 55.

Prior to the deceased's death, the deceased held the sole share and 100% of the voting rights in the company.

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

The deceased acquired the sole share in the Company on XX/XX/XXXX.

The Executors of the Estate are considering selling the share in the Company.

The Executors have operated the Company from the date of death of the deceased to the present day.

A valuation was prepared by a qualified valuer which states the net value of the CGT Assets of the Company at the date of death was less than $6 million.

The total net value of the CGT assets of the deceased, excluding the share in the Company, for the purposes of the maximum net asset value test is $XX,XXX.

Recently the Estate received offers for the sale of the share in the company ranging from $X,XXX,XXX to $X,XXX,XXX.

The Executors will be accepting the highest binding offer of $X,XXX,XXX.

Since the date of death the net assets of the Company have increased by $X,XXX,XXX under new management and dividends of $XXX,XXX have been paid.

For a total of more than half the time from the date of acquisition of the share by the deceased until their death, the market value of the active assets of the Company were 80% or more of the market value of the total assets of the Company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 152-10

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

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 152-20

Income Tax Assessment Act 1997 subsection 152-20(1)

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 Section 152-40

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

Income Tax Assessment Act 1997 Section 152-80

Income Tax Assessment Act 1997 Section 152-305

Income Tax Assessment Act 1997 Section 152-315

Income Tax Assessment Act 1997 Paragraph 152-315(1)(b)

Income Tax Assessment Act 1997 Section 152-320

Income Tax Assessment Act 1997 Section 152-325

Reasons for decision

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 of the ITAA 1997 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 the concessions if a CGT event happens in relation to the CGT asset within two years of the individual's death. The Commissioner can extend the two‑year period in certain circumstances.

Under Division 152 of the ITAA 1997 four different capital gains tax (CGT) concessions may be accessed if the basic conditions in Subdivision 152-A are satisfied. These are the small business:

(a) 15-year exemption (Subdivision 152-B of the ITAA 1997)

(b) 50% active asset reduction (Subdivision 152-C of the ITAA 1997)

(c) retirement exemption (Subdivision 152-D of the ITAA 1997)

(d) rollover (Subdivision 152-E 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 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, and

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

If the CGT asset is a share in a company or an interest in a trust, one of these additional basic conditions must be satisfied:

● You must be a 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 entity claiming the concession of at least 90%.

Application to your circumstances

Basic condition (a):

If the Estate disposes of the share, CGT event A1, relating to the disposal of a CGT asset will happen and this condition will be satisfied.

Basic condition (b):

If the Estate disposes of the share and the disposal gives rise to a capital gain, this condition will be satisfied.

Basic condition (c):

The MNAV test in section 152-15 of the ITAA 1997 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.

Section 152-20 of the ITAA 1997 explains the meaning of 'net value of the CGT assets'. Subsection 152-20(1) states the net value of the CGT assets of an entity is the amount (whether positive, negative or nil) obtained by subtracting from the sum of the market values of those assets the sum of:

(a) The liabilities of the entity that are related to the assets; and

(b) The following provisions made by the entity:

(i) Provisions for annual leave;

(ii) Provisions for long service leave;

(iii) Provisions for unearned income; and

(iv) Provisions for tax liabilities.

Shares held in a connected entity or affiliate are excluded when calculating the net value, as the net value of the CGT assets of the connected entity or affiliate are already included in the MNAV test (paragraph 152-20(2)(a) of the ITAA 1997).

In your case, from the information provided, the Commissioner accepts that the MNAV test was met by the deceased immediately before his death.

Basic condition (d):

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. 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 of the ITAA 1997 provides the meaning of an active asset. Under subsection 152-40(3), shares in a company will be an active asset at a given time if the company is an Australian resident, and the company passes the 80% test.

The 80% test requires that the total of the market value of the active assets of the company is 80% or more of the market value of all of the assets of the company.

In this case, the CGT asset to be disposed of is the share in the Company. You have advised that for a total of more than half the time from the date of acquisition of the share by the deceased until his death, the market value of the active assets of the Company were 80% or more of the market value of the total assets of the Company. Therefore, the share was an active asset for more than half the period of ownership by the deceased. Consequently, the share held in the Company satisfies the active asset test under section 152-35 of the ITAA 1997.

Additional basic condition

The deceased was a concession stakeholder in the Company just before he or she passed away as he or she was a significant individual, having a small business participation percentage of at least 20% (it was actually 100% as they were the sole shareholder).

Consequently, this additional basic condition that applies where the CGT asset is a share in a company has also been met.

Small business 50% active asset reduction

As the basic conditions have been satisfied you can apply the small business 50% active asset reduction in Subdivision 152-C of the ITAA 1997 to the net capital gain remaining after applying any current year capital losses and any unapplied prior year net capital losses (of the Estate), and the general 50% CGT discount.

Small business retirement exemption

For the purposes of the retirement exemption in Subdivision 152-D of the ITAA 1997, the trustee of a deceased estate is eligible for the retirement exemption to the same extent that the deceased would have been just prior to their death.

Accordingly, the Estate will be able to apply the retirement exemption and disregard the net capital gain remaining after applying the small business 50% active asset reduction, any current year capital losses and any unapplied prior year net capital losses (of the Estate), and the general 50% CGT discount provided it meets the conditions outlined in sections 152-305, 152-315 and 152-320 of the ITAA 1997.

Section 152-305 of the ITAA 1997 requires that the basic conditions are satisfied for the gain.

Section 152-315 of the ITAA 1997 addresses choosing the amount of the capital gain to be disregarded. It requires that the taxpayer's CGT retirement exemption limit is not exceeded and that the chosen CGT exempt amount must be specified in writing.

Section 152-320 of the ITAA 1997 provides that an individual's CGT retirement exemption limit is $500,000, reduced by any previous CGT exempt amounts the individual has disregarded (or had disregarded) under the retirement exemption. This includes amounts disregarded under former (repealed) retirement exemption provisions.

In this case, the Estate satisfies the basic conditions, and providing that the deceased had not used any portion of their CGT retirement exemption limit previously, the Estate is entitled to choose to apply the retirement exemption and disregard any amount of the remaining capital gain up to a maximum limit of $500,000.