Edited version of your written advice

Authorisation Number: 1051335914085

Date of advice: 8 February 2018

Ruling

Subject: CGT- small business concessions – deceased estate – Commissioner’s discretion

Question

Will the Commissioner exercise his discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the time limit to allow the small business capital gains tax (CGT) retirement exemption to be applied?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The deceased acquired the property after 20 September 1985.

The deceased operated farming business as a sole trader.

The deceased was a small business entity.

The deceased commenced using the property in the business immediately upon acquisition.

The deceased was involved in negotiations for the sale of the property prior to passing away.

The deceased would have been eligible to access the capital gains tax capital gains tax small business retirement exemption if the property had been sold before they passed away.

The deceased did not use any of their retirement exemption limit amount prior to passing away.

The deceased passed away in early 2015.

The property devolved to the deceased’s estate.

The trustees of the estate (You) sold the stock and agisted the property until it could be sold.

You wrote to one of the parties involved in negotiation for the sale of the property to resume negotiations in late 2015.

You engaged the services of a real estate agent in late 2016. The property was advertised for sale from this date onwards.

You sought an independent valuation for the property in 2015.

You received an offer to purchase the property from a potential purchaser in mid 2017. You did not accept this offer.

You received a conditional non-binding offer from another party shortly afterwards. You did not accept this offer, because it was below what you believed was fair value for the property and below the amount offered by the other potential buyer.

The final purchaser made a higher offer to buy the property in late 2017.

You signed the ‘offer to sell form’ required by the purchaser on the same day.

Settlement of the sale took place in late 2017.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

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 Section 152-320

Reasons for decision

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

● the deceased would have been able to apply the small business concessions themselves if they had disposed of the asset immediately prior to their death, and

● a CGT event happens within 2 years of the deceased’s death unless the Commissioner extends the time period in accordance with subsection 152-80(3) of the ITAA 1997.

You will be eligible for the concessions where the CGT event happens within two years of the individual’s death. The active asset test applies to you for any capital gain made on a sale of the assets after the two-year time limit. This means that if you do not continue to carry on the deceased’s business, or use the asset in another business, after the two-year time period, the active asset test may not be satisfied and the small business concessions may not be available.

Extension of time to dispose of asset

In determining whether the discretion to allow further time to dispose of the asset should be exercised, the Commissioner must consider 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.

Conclusion

In this case, we consider that a reasonable explanation for the delay in the disposal of the property has been provided. We consider that continuing efforts were made to dispose of the property after the deceased passed away. We do not consider that allowing this request would cause the unsettling of others or that there is any mischief involved.

Accordingly, the Commissioner will exercise his discretion under subsection 152-80(3) of the ITAA 1997 to extend the time period to 27 November 2017.

Small business concessions

The trustee of a deceased estate is eligible to apply the CGT small business concessions, including the retirement exemption to the same extent that the deceased would have been just prior to their death.

An individual’s CGT retirement exemption limit is $500,000, reduced by any previous CGT exempt amounts the individual has previously disregarded under the exemption.

The requirements of the retirement exemption are modified where you are the trustee of a deceased estate, and do not require the capital gain to be paid to a complying superannuation fund.

Basic conditions

Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions to be satisfied in order to access the CGT small business concessions. These conditions are:

(a) a CGT event happens in relation to a CGT asset of yours in an income year. This condition does not apply in the case of CGT event D1.

(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.

Application to your circumstances

The property has been sold which resulted in a capital gain, therefore conditions (a) and (b) have been satisfied. The deceased was a small business entity, therefore the requirements of condition (c ) have also been satisfied.

The active asset test 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.

The property was an active asset being used in the deceased’s farming business for the full period of ownership, therefore condition (d) is satisfied.

Conclusion

An extension of time to dispose of the asset has been granted and the basic conditions of the CGT small business concessions have been satisfied.

As the deceased had not used any portion of their CGT retirement exemption limit previously, you are entitled to choose to apply the retirement exemption and disregard any amount of the remaining capital gain (after applying capital losses and other concessions such as CGT discounts as appropriate) up to a maximum limit of $500,000.