Edited version of your written advice

Authorisation Number: 1051501517792

Date of advice: 10 April 2019

Ruling

Subject: CGT - small business concessions

Question 1

Is the company eligible for the small business 15-year exemption on the sale of the property?

Answer

No.

Question 2

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 until 30 September 2019 to allow the deceased estate to apply the small business capital gains tax concessions to the capital gain that will result from the cancellation of the shares?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The deceased was the sole shareholder of the company when they died.

The company purchased a Property more than 15 years ago.

The deceased carried on a business on the property during the ownership period.

The turnover of the business was less than $2million per annum.

When the deceased died the shares in the company were their only significant asset. They did not leave a valid will.

The deceased’s spouse obtained letters of administration of the estate.

The deceased child commenced legal proceedings seeking, among other things, to have the administrator of the estate removed.

The courts made orders replacing the administrator.

The liquidator of the company sold the Property.

The CGT small business concessions would have been available to the deceased if they had been alive when the company sold the property. In addition, the 15 year exemption would have been available to the company had the deceased been alive at that time.

The deceased’s spouse did not retire in connection with the sale of the Property, nor were they incapacitated.

The estate will receive the proceeds from the sale of the Property (less expenses) by way of a liquidator’s distribution.

The shares in the company will be cancelled within 18 months of the liquidator’s distribution.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 subsection 152-80(3)

Income Tax Assessment Act 1997 section 152-110

Reasons for decision

Question 1

The rules covering the small business 15-year exemption are contained in Subdivision 152-B of the ITAA 1997.

If you qualify for the small business 15-year exemption you can entirely disregard the capital gain you make from the disposal of a capital gains tax (CGT) asset and do not need to apply any other concessions. In addition, you do not have to apply capital losses against your capital gain before applying the exemption.

Under section 152-110 of the ITAA 1997 a company can disregard the capital gain made on the disposal of a CGT asset if the company:

(a) satisfies the basic conditions for the small business CGT concessions in Subdivision 152-A of the ITAA 1997 for the gain

(b) continuously owned the CGT asset for the 15-year period ending just before the CGT event

(c) had a significant individual for a total of at least 15 years (even if it was not the same significant individual during the whole period) during which the company owned the CGT asset, and

(d) an individual who was a significant individual of the company just before the CGT event either:

(i) was 55 or over at that time and the event happens in connection with the individual’s retirement, or

(ii) was permanently incapacitated at that time.

Significant individual test

Section 152-55 of the ITAA 1997 states that an individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. The 20% can be made up of direct and indirect percentages. One of the significant individuals of the company or trust must be either 55 or over at the time and the event happened in connection with the retirement of the individual or the individual must be permanently incapacitated.

Absolute entitlement

Draft Taxation Ruling TR 2004/D25 discusses the concept of ‘absolute entitlement’ and states, at paragraph 10, that:

The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.

Further, at paragraphs 21 and 22 of TR 2004/D25 it states:

A beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries).

Such a beneficiary will be absolutely entitled to that asset as against the trustee for the purposes of the CGT provisions if the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction

Importantly, paragraph 72 of TR 2004/D25 provides that:

A beneficiary of a deceased estate does not have an interest in any asset of the estate (and therefore cannot be considered absolutely entitled to any of the estate's assets) until the administration of the estate is complete. That is, until the assets of the estate have been called in and the deceased's debts and liabilities have been paid, see Commissioner of Stamp Duties (Qld) v. Livingston [1965] AC 694; [1964] 3 All ER 692.

In your case, the company does not satisfy the significant individual test. As the estate wasn’t fully administered when the property was sold, none of the beneficiaries were absolutely entitled to the shares in the company. Therefore, no individual has a small business participation percentage of at least 20% and the significant individual test cannot be satisfied. Therefore the company is not eligible for the 15-year exemption.

Alternatively, even if the deceased’s spouse is considered to have a small business participation percentage of more than 20%, they were not retiring in connection with the sale of the property, nor were they incapacitated. Therefore the significant individual test and the requirements for the 15-year exemption are not satisfied.

Question 2

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.

In determining whether the discretion to allow further time would be exercised, the Commissioner has considered 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.

In this case, we consider that a reasonable explanation for the delay in the disposal of the land holdings has been provided. Legal proceedings and having the administrator of the estate removed has delayed the administration of the estate. 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 30 September 2019.

Further issues for you to consider

This ruling has not fully considered your eligibility for the small business CGT concessions. You should ensure that you satisfy the relevant conditions for the concessions. More information is available on our website www.ato.gov.au by searching for ‘QC 22648’.