Edited version of private advice

Authorisation Number: 1051921600981

Date of advice: 17 November 2021

Ruling

Subject: CGT - small business concessions

Question 1

Will the property satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the Commissioner exercise the discretion under subsection 152-80(3) of the ITAA 1997 to extend the two year period to XX July 20XX?

Answer

Yes.

Question 3

Would the deceased have satisfied the conditions under section 152-305 of the ITAA 1997 to apply the small business retirement exemption immediately prior to their death?

Answer

Yes.

Question 4

Are the executors of the able to apply the small business retirement exemption to reduce or disregard the capital gain made upon disposal of the property under section 152-80 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

X Xxx 20XX

Relevant facts and circumstances

The Deceased (the deceased) died on XX April 20XX.

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

The deceased left a Will dated XX December 19XX.

Probate was granted to the executors on XX May 20XX.

The deceased had children from two separate marriages and named two children, one from each marriage as the executors of the estate.

The deceased had total net assets of less than $XXX at the time of their death.

The property was acquired by the deceased's late spouse prior to 20 September 1985.

The deceased and the late spouse operated a business in partnership on the property from 20XX until the late spouse's death on XX September 20XX.

The deceased acquired the property upon the death of their late spouse and continued to operate the business on the property as a sole trader until 20XX.

In 20XX and 20XX years, the business had reduced income due to external circumstances.

Due to the deceased's decline in health, the deceased made a verbal agreement with their relative, GN, allowing GN to lease the property temporarily, initially for a X year term, with the option to extend the lease on a yearly basis.

The deceased died within the first year of the agreement and the executors agreed to allow GN to continue operate their business on the property until the executors had finalised the estate.

After a lengthy disagreement between the beneficiaries, which lead to one of the executors engaging legal representation, a resolution was reached and the decision to sell the property was made.

The property was sold on XX July 20XX.

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 section 152-40

Income Tax Assessment Act 1997 section 152-80

Income Tax Assessment Act 1997 section 152-305

Reasons for decision

Detailed reasoning

Question 1

Active Asset Test

Section 152-35(1) 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(1) of the ITAA 1997 explains the meaning of an active asset is when you own the asset and it is used, ready to use in the course of carrying on a business that is carried on by you, your affiliate, or another connected entity.

Application to your circumstances

The deceased acquired the property from her late spouse upon their death on XX September 20XX. The deceased continued to use the property as a sole trader in their business from acquisition until April 20XX. Therefore, as the property was held for less than 15 years and was an active asset of the deceased's for more than half of that period, the property satisfies the active asset test under section 152-35 of the ITAA 1997.

Question 2

Subsection 152-80(3) of the ITAA 1997 allows the Commissioner to grant an extension of time to extend the two year period for the CGT event to occur. After considering your circumstances including the delay in Probate being granted and the disagreement between the executors and beneficiaries, the Commissioner will allow an extension of time for the disposal of the property to XX July 20XX.

Question 3

Retirement exemption

Under section 152-305 of the ITAA 1997, if you are an individual, you can choose to disregard all or part of a capital gain if:

(a)  you satisfy the basic conditions

(b)  you keep a written record of the amount you chose to disregard (the CGT exempt amount), and

(c)   if you are under the age of 55 years old just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account.

Basic conditions

Section 152-10(1) of the ITAA 1997 contains the basic conditions that must be satisfied to be eligible to apply 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 (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)           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.

Application to your circumstances

The deceased had total net assets of less than $XXX at the time of their death, therefore satisfying the maximum net asset value test and the property satisfies the active asset test. As such, the deceased would have met the basic conditions to apply the CGT small business concessions if the deceased had disposed of the property immediately prior to their death.

To apply the retirement exemption the deceased would also have needed to satisfy the conditions under section 152-305 of the ITAA 1997. The deceased satisfied the basic conditions, the deceased was over 55 years at the time of their death and there is no requirement to make a contribution to superannuation. The deceased would have met the conditions under section 152-305 of the ITAA 1997 as long as you keep a written record of the amount of capital gain you choose to disregard to satisfy the remaining condition under subsection 152-305(2) of the ITAA 1997. The amount of the capital gain that you choose to disregard must not exceed the deceased's CGT retirement exemption lifetime limit of $500,000.

Question 4

Section 152-80 of the 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 (executor) 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.

Application to your circumstances

The property transferred to the executors of the estate and the deceased would have been entitled apply the CGT small business retirement exemption to reduce or disregard the capital gain from the disposal of the property immediately prior to their death. The Commissioner has granted an extension of time for the disposal of the property to XX July 20XX. As the conditions under section 152-80 of the ITAA 1997 have been satisfied, the executors are able to apply the small business retirement exemption to the gain made upon the disposal of the property. The executors will be required to keep a written record of the amount disregarded under the retirement exemption and ensure the amount disregarded does not exceed the deceased's $500,000 retirement exemption lifetime limit.