Edited version of private advice

Authorisation Number: 1051607554375

Date of advice: 12 November 2019

Ruling

Subject: Small business retirement exemptions

Question 1

Will the Commissioner exercise the 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 15 year exemption to be applied to the original 50% ownership interest?

Answer

Yes

Question 2

Will the Commissioner exercise the discretion under subsection 152-80(3) of the ITAA 1997 to extend the time limit to allow the small business 50% exemption and the retirement exemption to be applied to the 50% interest acquired in 2007?

Answer

Yes.

This ruling applies for the following period:

Year ending 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The deceased and their spouse acquired a property (the Property) after 1985 and held their ownership interests as joint tenants.

The deceased and their spouse used the Property in their primary production business for a period of approximately 15 years.

The Property was then used by a connected entity, a Trust, to operate a primary production business.

The trust was controlled by the deceased and their spouse until the death of their spouse several years later.

The deceased controlled the Trust from the date of death of their spouse until the deceased passed away approximately X years later.

The deceased was aged over 55 years old when they passed away.

The deceased would have satisfied the basic conditions for the small business CGT concessions in relation to both ownership portions of the Property just before their death.

One of the adult children of the deceased was appointed executor of the estate.

Probate of the last Will and Testament of the deceased was granted less than 12 months after the date of death.

The executor of the estate of the deceased had the power to sell the assets of the estate and distribute the proceeds amongst the beneficiaries in satisfaction of their entitlements or to transfer the assets to them.

There were separate legal challenges in respect of the estate which commenced just after probate was granted and took over three years to be finalised.

The litigation concerned amounts to be distributed under the will and appointment of the executor.

The Property could not be sold during the period of litigation.

Both pieces of litigation were extremely time consuming and stressful for the executor.

A contract for the sale of the Property was exchanged more than three years after the date of death of the deceased.

The turnover of the Trust for the relevant income year was less than $2 million.

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-B

Income Tax Assessment Act 1997 Subdivision 152-C

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

Income Tax Assessment Act 1997 Subsection 152-10(1B)

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Paragraph 152-80(1)(d)

Income Tax Assessment Act 1997 Subsection 152-80(1)

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

Reasons for decision

The small business capital gains tax (CGT) concessions are contained in Division 152 of the ITAA 1997.

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 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 two years of the deceased's death unless the Commissioner extends the time period in accordance with subsection

·        152-80(3) of the ITAA 1997.

Basic conditions

Subdivision 152-A of theITAA 1997 contains the basic conditions that must be satisfied for an individual 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 the gain

(c) at least one of the following applies:

(i) the individual is a small business entity for the income year,

(ii) the maximum net asset value test in section 152-15 of the ITAA 1997 is satisfied,

(iii) the individual is 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.

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

Section 152-35 of the ITAA 1997 states that a CGT asset will satisfy the active asset test:

·        where the asset is owned for more than 15 years, if the asset was an active asset for a total of at least 7 ½ years during the period between when the asset was acquired and the earlier of when the CGT event happens or the relevant business ceases, or

·        where the asset is owned for 15 years or less, the asset satisfies the active asset test if the asset was an active asset for a total of at least half of the period between the date of acquisition and the earlier of when the CGT event happens or the relevant business ceased.

Section 152-40 of the ITAA 1997 states that a CGT asset is an active asset of an individual if the individual owns the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by the individual, an affiliate of the individual or another entity that is connected with the individual.

In this case, the deceased satisfied the basic conditions in relation to both ownership portions of the Property just before their death.

Small business 15 year exemption

The small business 15-year exemption in subdivision 152-B of the ITAA 1997 takes priority over the other small business concessions. If the small business 15-year exemption applies, the entire capital gain is disregarded so there is no need to apply any further concessions.

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 55 years or older and the event happened in connection with their retirement, or

-        they were permanently incapacitated.

Small business 50% reduction

If an individual does not qualify for the small business 15 year exemption, the small business 50% active asset reduction in subdivision 152-C of the ITAA 1997 may apply to reduce the capital gain.

Unlike the other small business concessions, the active asset reduction applies automatically if the basic conditions are satisfied, unless a choice is made not to apply it.

If the capital gain has already been reduced by the general 50% CGT discount, the 50% reduction applies to that reduced gain.

Small business retirement exemption

Subdivision 152-D of the ITAA 1997 contains the small business retirement exemption. A choice can be made to disregard all or part of a capital gain under the small business retirement exemption if certain conditions are satisfied.

An individual can choose to disregard all or part of a capital gain if:

·        they satisfy the basic conditions

·        if they are under 55 years old just before they choose to use the retirement exemption, they make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account (there is no requirement to make the contribution if the individual is 55 years old or older).

The amount of the capital gain that can be disregarded cannot exceed the CGT retirement exemption limit of $500,000.

CGT asset forming part of a deceased estate

Under section 152-80 of the ITAA 1997, where a CGT asset forms part of the estate of a deceased individual, the legal personal representative or beneficiary of the estate may disregard or reduce a capital gain in the same way as the deceased individual would have been entitled to, with the following modifications:

·        For the 15 year exemption:

-        the CGT event does not need to be in connection with the retirement of the deceased individual, and

-        the deceased needs to have been 55 or older immediately before their death, rather than at the time of the CGT event.

·        For the retirement exemption, the superannuation contribution requirement does not apply to individuals aged less than 55.

The CGT event must happen to the asset within two years of the individual's death unless the Commissioner extends the time limit.

Eligibility for small business concessions

In this case, the deceased:

·        acquired the original 50% ownership interest in the Property after 1985

·        acquired the other 50% ownership interest when their spouse passed away

·        passed away in 20XX

·        was aged over 55 at the time of death

·        held both ownership interest portions of the Property as an active asset

·        satisfied the basic conditions for relief

·        owned the original 50% portion for over 15 years, and

·        owned the other 50% portion for less than 15 years.

From the above, in relation to the original 50% ownership interest, it is evident that the deceased would have been able to apply the small business 15 year exemption themselves if they had disposed of the asset immediately prior to their death.

In relation to the 50% ownership interest acquired from their spouse, it is evident that the deceased would have been able to apply the small business 50% exemption and retirement exemption themselves if they had disposed of the asset immediately prior to their death.

However, as disposal of the property occurred more than two years following the death of the deceased, the discretion in subsection 152-80(3) of the ITAA 1997 must be considered.

Extension of two year time period

In determining whether the discretion to allow further time will be exercised, the Commissioner needs to 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.

In this case, the deceased passed away in 20XX, litigation in respect of the estate commenced just after probate was granted and was not finalised until over three years later.

Consequently, we consider that a reasonable explanation for the delay in the disposal of the Property has been provided. 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 the discretion in relation to the sale of the Property under subsection 152-80(3) of the ITAA 1997 to extend the time period until the ale contract was entered into.