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Edited version of your written advice
Authorisation Number: 1051381715549
Date of advice: 12 June 2018
Subject: CGT – deceased estate
Question
Will the Commissioner exercise his discretion in paragraph 152-80(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the period to dispose of an active asset from the date of death to the time of the CGT event?
Answer
No.
This ruling applies for the following period
1 July 20xx to 30 June 20xx
Relevant facts
The deceased passed away on #.
The property is a pre-CGT asset.
A long term lease was entered into over the property prior to the deceased’s death.
The lease agreement did not allow for vacant possession of the property to pass to a purchaser unless a significant sum was paid to the lessee.
The valuation report on the property stated that the existence of the lease made the property virtually unsaleable unless the lessee is paid out in accordance with the lease agreement.
The lease was allowed to run its course since there was no certainty that the price that could be obtained within the required two year limit would have been sufficiently higher to have justified the required payment to the lessee.
The estate disposed of the property on #.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 152
Income Tax Assessment Act 1997 Paragraph 152-80(1)(d).
Income Tax Assessment Act 1997 Subsection 152-80(3).
Income Tax Assessment Act 1997 Subsection 152-80(1).
Reasons for decision
Section 152-80 of the ITAA 1997 allows either the legal representative of an estate or the beneficiary to apply the small business CGT concessions in respect of the sale of the deceased’s CGT assets 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.
Small business CGT concessions – 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 for the small business CGT concessions in Subdivision 152-A of the ITAA 1997 (as relevant to this case) are:
● the small business entity test and
● the active asset test.
Small business entity
You will be a small business entity if you are an individual, partnership, company or trust that is carrying on a business and has an aggregated turnover was less than $2 million.
In this case, from the information provided is accepted that the deceased operated a business with a turnover of less than $2 million. The Property was used in this business activity.
The small business entity test has been met.
Active asset test
The active asset test is contained in section 152-35 of the ITAA 1997. 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 detailed below; 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 is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.
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.
Therefore the Property was an active asset during the period it was owned by the deceased.
Small business 15 year exemption
An individual can disregard a capital gain from a CGT event happening to a CGT asset they have owned for at least 15 years if they:
● satisfy the basic conditions for the small business CGT concessions
● continuously owned the CGT asset for the 15 year period ending before the CGT event happened, and
● when the CGT event happened:
● they were permanently incapacitated, or
● they were 55 years or older and the event happened in connection with their retirement.
The beneficiary of a deceased estate 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, and
● the deceased needs to have been 55 or older immediately before their death, rather than at the time of the CGT event.
The property was acquired prior to 20 September 1985 and is a pre-CGT asset.
Capital gains from the sale of a pre-CGT asset are disregarded under subsection 104-10(5) of the ITAA 1997.
Whilst the deceased continuously owned the property for more than 15 years and it was an active asset, had he disposed of the property prior to his death, any resultant capital gain would have been disregarded under subsection 104-10(5) of the ITAA 1997 and not Division 152 of the ITAA 1997.
Paragraph 152-80(1)(c) of the ITAA 1997 states that the section only applies if:
‘the deceased individual referred to in subparagraph (a)(i) or (ii) would have been entitled to reduce or disregard a *capital gain under this Division if a *CGT event had happened in relation to the CGT asset immediately before his or her death..’
As the deceased would not have been entitled to reduce or disregard the capital gain under Division 152 as required by paragraph 152-80(1)(c) of the ITAA 1997, section 152-80 of the ITAA 1997 does not apply.
Therefore the small business 15 year exemption cannot be applied to capital gain resulting from the sale of the deceased’s property.
An extension will not be granted in relation to the sale of the Property as the requirements are not met for any of the small business CGT concessions had it been sold prior to the deceased’s death.
Summary
The small business CGT concessions cannot be applied to the capital gain resulting from the sale of the deceased’s property as it is a pre-CGT asset. As such, any capital gain would have been disregarded by Division 104 of the ITAA 1997 and not Division 152 of the ITAA 1997 as required.