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Edited version of your written advice
Authorisation Number: 1051328627648
Date of advice: 23 January 2018
Ruling
Subject: Small business concessions
Question 1
Would the deceased have met the basic conditions just prior to the date of death for small business relief under section 152-10 of the ITAA 1997?
Answer
Yes
Question 2
Would the deceased have been entitled to apply the 15 year exemption just prior to the date of death under section 152-105 of the ITAA 1997?
Answer
Yes
Question 3
Would the deceased have been entitled to apply the 50% Active Asset Reduction just prior to the date of death under section 152-200 of the ITAA 1997?
Answer
Not applicable
This ruling applies for the following period:
Year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
The deceased inherited a property (the property) after 20 September 19XX.
The property was used in the course of carrying on a mixed farming business by the deceased from date of acquisition and to just prior to the date of the deceased’s death.
The farm was a small business entity and the deceased operated the business as a sole trader.
The deceased’s turnover at no time exceeded $$$ million.
The property was not used to derive rent during the period of ownership interest.
The deceased passed away in April 20XX and their age was greater than 55 years at the date of death.
The property was listed for auction in September 20XX and sold the same day. The property settled within two years of the deceased’s date of death.
A capital gain occurred as a result of the sale of the property.
Relevant legislative provisions
Section 152-10 of the Income Tax Assessment Act 1997
Section 152-35 of the Income Tax Assessment Act 1997
Section 152-80 of the Income Tax Assessment Act 1997
Section 152-105 of the Income Tax Assessment Act 1997
Section 152- 200 of the Income Tax Assessment Act 1997
Reasons for decision
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.
A capital gain that you make may be reduced or disregarded under Division 152 if the following basic conditions are satisfied:
(a) a CGT event happens in relation to a CGT asset of yours in an income year;
(b) the event would 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;
(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership;
(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;
(d) the CGT asset satisfies the active asset test.
Active asset test
This test requires the CGT asset to be an active asset for:
● 7 years, if owned for more than 15 years, or
● half of the ownership period if owned for 15 years or less.
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, you affiliates, your spouse or child or an entity connected with you.
In this case, the property was inherited after 20 September 19XX by the deceased, a CGT event occurred in relation the property within two years of the date of death and the event resulted in a gain. The deceased operated a small business farming entity on the property from the date of acquisition until the date of death. The property was owned for more than 15 years and we accept that it was an active asset for more than 7 years. As a result of the above, the basic conditions and active asset test would have been satisfied just prior to the deceased’s date of death.
15 year exemption
To qualify for the 15 year exemption, the basic conditions must be satisfied and the asset must have been continuously owned the CGT asset for the 15 year period ending just before the CGT event happened.
Death and the 15 year exemption
Under subsection 152-80(2), an entity will be eligible for the 15 year exemption to the same extent that the deceased would have been just prior to their death, except that:
● the CGT event does not need to be 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.
In this case, the deceased satisfied the basic conditions and the active asset test just prior to their death. The deceased was over the age of 55 immediately before their death and therefore the conditions for the 15 year exemption are satisfied.
50% Active Asset Reduction
To apply the small business 50% active asset reduction, you need to satisfy only the basic conditions. There are no further requirements.
In this case, the deceased satisfied the basic conditions and the active asset test just prior to their death and therefore, the conditions for the 50% Active Asset Reduction are satisfied.
This rule does not apply if the 15-year exemption already applies to the capital gain, since such a gain is already disregarded. As discussed above the 15 year exemption applies.