Edited version of private advice

Authorisation Number: 1051908342777

Date of advice: 9 October 2021

Ruling

Subject: CGT - extension of time to apply the 15-year exemption

Question 1

Will the Commissioner, pursuant to subsection 152-80(3) of the Income Taxation Assessment Act 1997 (ITAA 1997), grant an extension of time until XX December 20XX to apply the CGT small business concessions in relation to the disposal of the deceased's interest in the property?

Answer

Yes.

Question 2

Will section 152-80 of the ITAA 1997 allow the trustee to apply the small business 15-year exemption to disregard the capital gain made on the disposal of the deceased's interest in the property?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

XX XXXber 20XX

Relevant facts and circumstances

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

The deceased was over 55 years at the time of their death.

The deceased owned 50% of property, XXXX (the property) in partnership with his XXXX.

The property was purchased by the deceased and his brother after 20 September 1985.

The partnership, XXX, operated a primary production business of farming.

The partnership was registered in XXX 19XX and the deceased was actively working prior to his death.

On X XXX 20XX, probate was granted and commenced administration including selling the property.

The land was prepared for sale between XXX and XXX.

On XX December 20XX real estate agent ABC Pty Ltd was contracted to sell the property, however although some buyers showing interest, the property did not sell.

On XX December 20XX, an additional real estate agent, DEF Pty Ltd was also contracted to sell the property.

The property was sold on XX XXXber XX.

Relevant legislative provisions

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

Income Taxation Assessment Act 1997 Division 152

Income Taxation Assessment Act 1997 section 152-10

Income Taxation Assessment Act 1997 section 152-35

Income Taxation Assessment Act 1997 section 152-80

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

Income Taxation Assessment Act 1997 section 152-105

Reasons for decision

Question 1

Division 152 of the Income Taxation Assessment Act 1997 (ITAA 1997) allows either the legal personal representative or beneficiary of an estate 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 facts of your application, noting the delay in probate being granted and the failed property sale attempt through your first real estate agent, we accept that you reasonably attempted to sell the property within the 2 year period, therefore the Commissioner will allow an extension of time beyond two years in accordance with subsection 152-80(3) of the ITAA 1997 to XX December 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.

Section 152-10(1AA) of the ITAA 1997 defines a CGT small business entity as:

•         you are a small business entity for the year; and

•         you would be a small business entity for the year as per section 328-110 of the ITAA 1997, if each reference to $10 million was a reference to $2 million.

Subsection 328-110(1) of the ITAA 1997 states that you are a small business entity if:

•         you carry on a business in the income year; and

•         one or both of the following applies:

(i) you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million;

(ii) your aggregated turnover for the current year is likely to be less than $10 million.

For the purpose of applying subparagraph 152-10(1)(c)(i) of the ITAA 1997, the reference to 'you' in section 328-110 of the ITAA 1997 is to the partner individually. Furthermore, subsection 328-110(6) of the ITAA 1997 states: a person who is a partner in a partnership in an income year is not, in his or her capacity as a partner, a small business entity for the income year. The individual partners of the partnership are not small business entities and therefore subparagraph 152-10(1)(c)(iii) of the ITAA 1997 requires the partnership to satisfy the small business entity test.

An asset is a partnership asset if the partners own the asset in accordance with their respective interests as specified in the partnership agreement. Partners may be eligible for the concessions if they met the following conditions:

•         the asset is the partner's interest in a partnership asset, and

•         that partnership is a small business entity.

Section 108-5(1) of the ITAA 1997 explains a CGT asset is any kind of property, or a legal or equitable right that is not property. Section 108-5(2)(c) and (2)(d) of the ITAA 1997 confirm this includes any interest in an asset of a partnership.

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

(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 a partner in a partnership with another family member immediately prior to the deceased's death. The partnership would be considered a small business entity as it carried on a business and had a turnover of less than $2 million. The property was jointly owned by the partners and was actively used in the partnership business since acquisition. If the deceased had disposed of his interest in the property immediately prior to their death, the deceased would have met the basic conditions to apply the CGT small business concessions.

The deceased would have had to meet additional conditions to apply the small business 15-year exemption to disregard any capital gain from the disposal of their interest in the property if they had disposed of it immediately prior to their death.

As previously stated, the deceased would have satisfied the basic conditions immediately prior to their death. The deceased owned their interest in the property for more than 15 years prior to their death and was over 55 years at the time of their death. There is no requirement in this case to meet the 'in connection with retirement' condition. As such the deceased would have met the conditions under section 152-105 of the ITAA 1997 to apply the small business 15-year exemption if they had disposed of their interest in the property immediately prior to their death.

As the conditions under section 152-80 and section 152-105 of the ITAA 1997 have been met and the Commissioner had granted an extension of time, the executor or beneficiary is entitled to apply the small business 15-year exemption to disregard any capital gain made from the disposal of the deceased's interest in the property.