Edited version of private advice

Authorisation Number: 1051798240028

Date of advice: 08 February 2021

Ruling

Subject: Commissioner's discretion - small business 15-year exemption

Question 1

Will the Commissioner exercise his discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997)to extend the two-year period to dispose of the deceased's farming properties?

Answer

Yes

Question 2

Can the trustee for the deceased estate apply the small business 15-year exemption to the capital gains made on the disposal of the deceased's farming properties?

Answer

Yes, in part, the 15-year exemption will apply to the deceased's X percent interest in the farming properties acquired in 19XX. The deceased's original X percent interest in the farming properties precedes the introduction of capital gains tax and the small business CGT concessions will not apply. The remaining X percent interest has not been held continuously for 15 years and will not be eligible for the 15-year exemption.

Question 3

Can the trustee for the deceased estate apply the small business 50 percent active asset reduction and small business retirement exemption to the capital gains made on the disposal of the deceased's farming properties?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The deceased together with their siblings and prior to that, their parents, conducted a primary production business on a number of parcels of land in NSW.

The primary production business was originally operated by the deceased's parents and then later as a partnership with four siblings.

In total there was approximately XX acres of property.

The land comprising the primary residence was acquired in the 19XXs by the deceased's parents. Additional parcels of land were acquired in the 19XXs, 19XXs and in 20XX. All the properties were adjacent to each other.

After the deceased's parents passed away, the properties were then left equally to the children, who have since passed away.

Prior to the deceased's passing, all the farming properties had been transferred to them from each of the deceased siblings.

If the deceased had disposed of the farming properties immediately prior to their passing, they would have been eligible to claim the small business CGT concessions in relation to their interests in the farming properties acquired from 20 September 1985.

The farming properties are located in a national disaster zone, in drought and bushfire declared areas and together with the impacts of the Covid-19 pandemic delayed the sale of the farming properties of the estate.

The properties were listed for sale in 20XX with a local real estate agent and were eventually sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 subsection 152-40(4)(e)

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

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 Subdivision 115-C

Income Tax Assessment Act 1997 section 152-305

Income Tax Assessment Act 1997 subsection 152-315

Income Tax Assessment Act 1997 subsection 152-320(1)

Reasons for decision

Summary

Question 1

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 CGT concessions themselves if they had disposed of the asset immediately prior to their death;

•                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.

On the basis the farming properties are located in a national disaster zone, in drought and bushfire declared areas and the impacts of the Covid-19 pandemic delaying the sale of the farming properties of the estate, the Commissioner will exercise his discretion under subsection 152-80(3) of the ITAA 1997 to extend the time period beyond two years.

Question 2

Small business concessions - 15-year exemption

Under paragraph 152-105 of the ITAA 1997, you can disregard a capital gain from a CGT event happening to a CGT asset you have owned for at least 15 years if all the following conditions are satisfied:

(a)       the basic conditions under section 152-10 of the ITAA 1997;

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

(c)       either:

•                you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or

•                you are permanently incapacitated at the time of the CGT event.

Application to your circumstances

Basic Conditions

On the basis a capital gain has arisen on the disposal of the farming properties; the deceased was a small business entity for the relevant income year and the farming properties were considered active assets, the basic conditions are satisfied.

15-year ownership period

The deceased acquired their initial X percent interest in the farming properties in 19XX, on the basis this interest precedes the introduction of capital gains tax on 20 September 1985, this component is exempt from capital gains tax up to the date of the deceased's passing and the small business CGT concessions will not apply.

The deceased acquired a further interest of X percent in the farming properties in 19XX when one sibling passed away. This interest would satisfy the continuous ownership period of 15 years just before the disposal of the properties.

The deceased acquired further interests of X and XX percent in the farming properties which do not qualify for the 15-year exemption as they do not satisfy the continuous ownership period of 15 years just before the disposal of the farming properties.

As only X percent of the farming properties have been owned for longer than 15 years, the 15-year exemption will only apply to that percentage. The remaining X percent interests in the farming properties are not eligible for the 15-year exemption.

Permanently incapacitated

The deceased had passed away at the time of the disposal of the properties.

Question 3

Small business 50 percent reduction

To apply the small business 50 percent reduction, the basic conditions in section 152-10 of the ITAA 1997 need to be satisfied. There are no other requirements.

As mentioned above at question 2, on the basis a capital gain has arisen on the disposal of the farming properties; the deceased was a small business entity for the relevant income year and the farming properties were considered active assets, the basic conditions are satisfied. This means that the small business 50 percent reduction may be applied to reduce any capital gain arising from the disposal of the deceased's X percent interests in the farming properties.

Small business retirement exemption

To apply the small business retirement exemption, the conditions in subsection 152-305 of the ITAA 1997 need to be satisfied. These conditions include:

(a)       the basic conditions in section 152-10 of the ITAA 1997;

(b)       if the taxpayer is under 55 just before making the choice - an amount equal to the asset's CGT exempt amount is contributed to a complying superannuation fund or an RSA,

(c)       the contribution is made at the later of when the choice is made and when the proceeds are received.

As mentioned above, the deceased would have satisfied the basic conditions under section 152-10 of the ITAA 1997 just before their passing, this means that the retirement exemption may be applied to further reduce (after the application of the 50 percent general CGT discount and small business 50 percent reduction) any capital gain arising from the disposal of the deceased's X percent interests in the farming properties. There is no requirement to contribute an amount to a complying superannuation fund or RSA, however the amount must not exceed the lifetime CGT retirement exemption limit of $500,000.