Edited version of private advice

Authorisation Number: 1051921935621

Date of advice: 25 November 2021

Ruling

Subject: Small Business CGT concessions - replacement asset rollover - death before end of replacement asset period

Question

As a result of the death of the taxpayer, does the small business CGT rolled over deferred gain get disregarded when the death was prior to the end of the 2-year replacement asset period and the taxpayer had not acquired a replacement asset before death, such that there are no gains to be reported in the deceased taxpayers final tax return nor in the estate's tax return?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

DDMMYYYY

Relevant facts and circumstances

The taxpayer met the small business CGT concession requirements in relation to a capital gain in the 20XX financial year and in their 20XX tax return small business CGT concessions were claimed, including a gain claimed as a small business rollover for the 2 year replacement asset period.

In that 20XX tax return, as they met the tests the taxpayer could instead have utilised the retirement exemption for the gain and as they were already aged over 55 they would not have had to actually roll the gain into their superfund.

They instead chose the small business rollover to defer the gain for 2 years so that at the end of the 2 years if they had not acquired a replacement asset then when the deferred gain was reinstated via CGT event J5, they could claim the retirement exemption then and rollover the gain into their superfund at that point if they had the cash to do so.

The taxpayer died before the end of the 2-year replacement asset period and had not acquired any replacement assets before death.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-E

Income Tax Assessment Act 1997 section 128-10

Reasons for decision

The CGT small business roll-over concession allows a small business entity, who meets eligibility criteria, to disregard all or part of a capital gain made on a relevant asset. Where roll-over under subdivision 152-E of the Income Tax Assessment Act 1997 (ITAA 1997) is chosen, the taxpayer is required to acquire a replacement asset, or incur fourth element expenditure to improve or maintain another asset.

Where a replacement asset is not acquired, or capital expenditure has not been incurred to improve or maintain another asset by the end of the replacement asset period, a CGT event will occur on the date of expiration of the replacement asset period. In this scenario, CGT event J5 occurs and as per subsection 104-197(4) of the ITAA 1997 the taxpayer will make a capital gain equal to the capital gain made on the sale of the original asset which was initially disregarded. The replacement asset period is generally 2 years after the disposal of the original asset.

In the circumstances where the taxpayer has passed away and a replacement asset was acquired, or capital expenditure is made on another asset which forms part of the estate of a deceased taxpayer, under section 152-420 of the ITAA 1997, provided certain other requirements are met, anything done or not done by the deceased in relation to the asset is treated as if it had been done by either the legal personal representative or a beneficiary.

In addition, section 152-80 of the ITAA 1997 states that where a CGT asset forms part of the estate of a deceased individual and it devolves to the individual's legal personal representative (LPR) or passes to a beneficiary, the LPR or beneficiary will be entitled to reduce or disregard the capital gain where the deceased individual would have been eligible to reduce or disregard the capital gain under a small business concession if a CGT event had occurred immediately before their death. This is subject to the deceased individual having met the requirements in subsection 152-80(2).

In the current matter, the CGT asset which gave rise the original capital gain had already been disposed of and roll-over elected and as such, that CGT asset cannot pass to either an LPR or beneficiary. While the proceeds of the disposal may form part of the estate, since no replacement asset had been acquired at the time of the taxpayer's death, there is no replacement asset which could form part of their estate such that section 152-80 of the ITAA 1997 could apply.

Conclusion

CGT event J5 can only occur at the end of the replacement period. As the taxpayer was deceased at that time, CGT event J5 cannot arise for the taxpayer. The fact the taxpayer is deceased at that time prevents any capital gain from CGT Event J5 arising. Similarly, section 152-420 of the ITAA 1997 can have no application since a replacement asset was not acquired by the taxpayer. As a consequence, the capital gain on the disposal of the original asset on which rollover was claimed will be permanently disregarded.