Edited version of private advice

Authorisation Number: 1051896134649

Date of advice: 8 September 2021

Ruling

Subject: CGT - small business concessions

Question 1

Will the Commissioner, pursuant to subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997), allow an extension of time to 20 September 20XX?

Answer

Yes

Question 2

Will section 152-80 of the ITAA 1997 apply to allow the trustee to apply the CGT small business concessions to reduce or disregard the capital gain made from disposal of property interest 1?

Answer

No

Question 3

Will section 152-80 of the ITAA 1997 apply to allow the trustee to apply the CGT small business concessions to reduce or disregard the capital gain made from disposal of property interest 2?

Answer

Yes

Question 4

Can the trustee apply the small business 15 year exemption to disregard the capital gain made on the disposal of property interest 2?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased (the deceased) died on XX July 20XX.

A Testamentary Trust was established pursuant to the deceased's Will dated XX July 20XX.

The deceased owned a property (the property).

The property was acquired prior to 20 September 1985 with a one-third interest acquired by the deceased (property interest 1) and a two-third interest acquired by the deceased's spouse (property interest 2).

The deceased inherited the spouse's two third interest in the property (property interest 2) upon their death XX July 20XX.

The property has been used in the business since acquisition, firstly by the deceased and their spouse in partnership and by the deceased as a sole trader after the spouse's death.

The business was continued by the estate until the sale of the property XX September 20XX.

The deceased's Will was the subject of various challenges and these challenges were resolved by a Court order issued on XX February 20XX.

Letters of administration were granted on XX July 20XX.

The property was listed for sale and sold on XX September 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-80

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-105

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

Income Tax Assessment Act 1997 subsection 104-10(5)

Income Tax Assessment Act 1997 paragraph 152-10(1)(b)

Income Tax Assessment Act 1997 Division 152

Reasons for decision

Section 152-80 of the Income Tax Assessment Act 1997 (ITAA 1997) allows either the legal personal representative of an estate or the beneficiary to apply the CGT small business 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 entitled to reduce or disregard a capital gain under this Division (Division 152 of the ITAA 1997) if a CGT event had happened in relation to the asset immediately before 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

Section 152-10 of the Income tax Assessment Act 1997 (ITAA 1997) contains the basic conditions that must be satisfied to be eligible to apply the CGT small business concessions. These conditions are:

(a)    a CGT event happens in relation to a CGT asset in an income year.

(b)    the event would (apart from this Division) 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

(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 or

(iv)          you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.

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

To be eligible to apply the small business CGT concessions all four of the basic conditions must be satisfied.

15 year exemption

Section 152-105 of the ITAA 1997 provides that an individual can entirely disregard any capital gain if all the following conditions are satisfied:

(a)  you satisfy the basic conditions

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

(c)   you are either:

                              i.        55 or over at the time of the CGT event and the event happens in connection with your retirement; or

                             ii.        permanently incapacitated at the time of the CGT event.

Application to your circumstances

Extension of time

Taking into consideration the legal challenges to the deceased's Will and the time it took to resolve the challenges, the Commissioner will allow an extension of time to 20 September 2019 in accordance with subsection 152-80(3) of the ITAA 1997.

Property interest 1

The deceased acquired property interest 1 in 19XX. Any capital gain or capital loss made on the disposal of the property by the deceased would have been disregarded under subsection 104-10(5) of the ITAA 1997 as the property was acquired prior to 20 September 1985 (pre-CGT). As such the CGT small business concessions would not apply to property interest 1 and any gain would not be reduced or disregarded under Division 152, therefore the basic condition in paragraph 152-10(1)(b) of the ITAA 1997 will not be satisfied.

As the basic conditions have not been satisfied in relation to property interest 1, the deceased would not have been entitled to apply the CGT small business concessions to reduce or disregard a capital gain made if the deceased had disposed of property interest 1 immediately prior to their death. Therefore section 152-80 of the ITAA 1997 will not apply. The trustee cannot apply the CGT small business concessions to the gain made on the disposal of property interest 1.

Property interest 2

As property interest 2 was acquired after 20 September 1985 and the deceased would have met the remaining basic conditions under section 152-10 of the ITAA 1997 (the deceased was a small business entity and the property was an active asset immediately before the deceased's death), the deceased would have been entitled to reduce or disregard any capital gain under Division 152 of the ITAA 1997 if the deceased had disposed of the property interest 2 immediately prior to their death. Therefore section 152-80 of the ITAA 1997 will apply to allow the trustee to apply the CGT small business concessions to the gain made on the disposal of property interest 2.

15 year exemption

In order to be eligible to apply the small business 15 year exemption to disregard any capital gain made, the CGT asset must be continuously owned for at least 15 years just before the CGT event. The deceased acquired property interest 2 on XX July 20XX. Property interest 2 has not be owned by the deceased for 15 years and therefore the small business 15 year exemption will not apply.

As mentioned above, the deceased would have satisfied the basic conditions under section 152-10 of the ITAA 1997 just before their death, this means that the small business 50% active asset reduction and the small business retirement exemption may be applied to reduce the capital gain made from the disposal of property interest 2. There is no requirement to contribute an amount to a complying superannuation fund or RSA, however the amount must not exceed the lifetime retirement exemption limit of $500,000.