Edited version of private advice

Authorisation Number: 1051902337896

Date of advice: 9 October 2021

Ruling

Subject: Extension of time to apply capital gains tax small business concessions

Question

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

Answer

Yes.

Question 2

Will section 152-80 of the ITAA 1997 allow you to apply the small business 15-year exemption under section 152-105 of the ITAA 1997 to disregard any capital gain made from the transfer of share 1?

Answer

Yes.

This ruling applies for the following periods:

30 June 20XX

The scheme commences on:

XX December XXXX

Relevant facts and circumstances

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

The deceased did not leave a Will.

You became the spouse of the deceased on XX XXX 20XX and did not have any children together.

The deceased had X children with a previous spouse.

In XXX 20XX, a bushfire broke out near your house and you had to evacuate.

On XX XXX 20XX, letters of administration were granted by the relevant court, which enabled you to administer the deceased's estate.

The deceased's assets included a self-managed superannuation fund (the fund) and X shares in the deceased's company ABC Pty Ltd (ABC)

ABC Pty Ltd

In XXX 20XX, a valuation of ABC resulted in the shares equating to $X.

In XXX 19XX, ABC was established with X shares issued, X to the deceased (share 1) and the remainder to the deceased's then spouse (share 2).

In August 20XX the deceased acquired his then spouse's share due to a relationship breakdown, resulting in the deceased holding all ABC shares.

In XXX 20XX, one of the deceased's children, who had been working in the business, became a director of ABC.

More than 80% of the Assets of ABC are active assets.

The Fund

On XX XXX 20XX, the deceased signed a non-binding death benefit nomination requiring the trustee of the fund to pay the death benefit of their estate, to be dealt with under the terms of their Will or under the rules of intestacy in the relevant state.

The fund owned X properties.

After becoming the fund trustee, you spent time preparing the properties for auction on XX XXX 20XX, however due to COVID-19 restrictions, the auction was cancelled.

Some of the properties sold in XXX 20XX.

The remaining property sold on XX XXX 20XX.

During the administration of the estate, your child was diagnosed with a medical condition and required treatment.

Between XXX and XXX 20XX, you finishing renovations started prior to the deceased's death to prepare the property for sale. The property sold at the end of XXX 20XX.

The intestacy rules of the relevant Act provide that where someone has died intestate leaving a partner and children who are not children of that partner, then the partner is entitled to the deceased's personal chattels (known as "statutory legacy ") interest and half the balance of the residue estate. The other half or balance of the residuary estate passes to the children in equal shares.

You currently hold both Shares in ABC in your capacity as trustee of the deceased estate.

Under the intestacy rules, you will acquire share 1 which you intend to gift to the deceased's children.

Under the intestacy rules, share 2 will be held jointly by the deceased's children.

Relevant legislative provisions

Income Taxation Assessment Act 1997 section 104-10

Income Taxation Assessment Act 1997 section 115-5

Income Taxation Assessment Act 1997 section 128-15

Income Taxation Assessment Act 1997 section 152-10

Income Taxation Assessment Act 1997 section 152-15

Income Taxation Assessment Act 1997 section 152-35

Income Taxation Assessment Act 1997 section 152-40

Income Taxation Assessment Act 1997 section 152-80

Income Taxation Assessment Act 1997 section 152-105

Income Taxation Assessment Act 1997 section 152-205

Income Taxation Assessment Act 1997 section 152-215

Reason for decision

Detailed Reasoning

Question 1

Section 152-80 of the Income Taxation Assessment Act 1997 (ITAA 1997) allows either the legal personal representative of an estate or the beneficiary to apply the capital gains tax (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 transfers to the legal personal representative or passes to a beneficiary;

•         The deceased would have been entitled to reduce or disregard a capital gain from a CGT event under the small business concessions, immediately before their death;

•         A CGT event occurred within two years of the deceased's death, with the exception of subsection 152-80(3) of the ITAA 1997, where the Commissioner can allow an extension of time.

The two year time limit prescribed may be extended by the Commissioner in certain circumstances. In determining whether a longer period will be allowed, the Commissioner will consider a range of factors such as:

•         whether there is evidence of an acceptable explanation for the period of extension requested and whether it would be fair and equitable in the circumstances to provide such an extension;

•         whether there is any prejudice to the Commissioner if the additional time is allowed, however the mere absence of prejudice is not enough to justify the granting of an extension;

•         whether there is any unsettling of people, other than the Commissioner, or of established practices;

•         fairness to people in like positions and the wider public interest;

•         whether there is any mischief involved; and

•         the consequences of the decision.

Application to your circumstances

After taking into consideration the complexity of the deceased estate, which included the wind up of the deceased's self-managed superannuation fund encompassing the sale of multiple commercial properties, that you were affected by the bushfires and the illness of your child, the Commissioner will allow an extension of time beyond two years in accordance with subsection 152-80(3) of the ITAA 1997 to XX XXXber 20XX.

Question 2

Basic conditions

Section 152-10 of the 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)          the conditions mentioned in subsection (1A) or (1B) 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.

Active Asset Test

Section 152-35 of the ITAA 1997 states that a CGT asset satisfies the active asset test 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 period owned; 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.

Section 152-40(3) of the ITAA 1997 explains CGT asset is also an active asset at a given time if, at that time, you own it and:

(a)  it is either a share in a company that is an Australian resident at that time or an interest in a trust that is a resident trust for CGT purposes for the income year in which that time occurs; and

(b)  the total of:

                              i.        the market values of the active assets of the company or trust; and

                             ii.        the market value of any financial instruments of the company or trust that are inherently connected with a business that the company or trust carries on; and

                            iii.        any cash of the company or trust that is inherently connected with such a business.

is 80% or more of the market value of all of the assets of the company or trust.

15-year exemption

Section 152-105 of the ITAA 1997 provides that an individual can entirely disregard any capital gain if the deceased had met the requirements of the following conditions:

(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) if the CGT asset is a *share in a company or an interest in a trust - the company or trust had a *significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset;

(d) either:

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

(ii) you are permanently incapacitated at the time of the CGT event.

Application to your circumstances

The deceased was the sole shareholder and controller of ABC prior to their death, which is a small business entity. Share 1 would meet the active asset test as the deceased had held the share for over 15 years and it was an active asset for over 7.5 years. Share 1 also meets the additional condition for shares to be an active asset as it is a share in an Australian resident company and more than 80% of the assets of ABC are active assets. As such the deceased would have met the basic conditions to apply the CGT small business concessions if the deceased had disposed of Share 1 immediately prior to their death.

As the Commissioner has granted an extension of time under 152-80(3), you meet the conditions to apply the CGT small business concessions to any capital gain made from the disposal of Share 1.

To apply the small business 15-year exemption the deceased would have to meet the basic conditions and the additional conditions. As previously discussed, the deceased would have met the basic conditions. The deceased had held share 1 for more than 15 years immediately prior to their death and as the deceased was the sole shareholder, the deceased would be considered a significant individual and had been for more than 15 years. The deceased was over 55 years at the time of their death and there is no requirement, in this case, to show there is a connection with retirement. As such the deceased would have met the additional conditions to apply the small business 15-year concessions to disregard any capital gain made from the disposal of share 1 immediately prior to their death.

As the conditions for both section 152-80 and section 152-105 of the ITAA 1997 have been satisfied, you are entitled to apply the small business 15-year exemption to any capital gain made upon the disposal of share 1.