Edited version of private advice

Authorisation Number: 1051929651577

Date of advice: 8 February 2022

Ruling

Subject: CGT - small business 15 year exemption

Question

Will the Commissioner exercise his discretion under subsection 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to dispose of the asset?

Answer

Yes, the Commissioner will exercise his discretion and extend the 2-year period.

Note: Subsection 118-120(3) of the ITAA 1997 specifies the maximum area of land that is covered by the main residence exemption (including the area under the dwelling) must not exceed 2 hectares.

Question 2

Will the CGT small business 15-year exemption apply to the sale of the asset?

Answer

No, as the deceased would not have been entitled to apply the 15-year exemption if they had disposed of the asset just prior to their death.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

30 January 20XX

Relevant facts and circumstances

The deceased owned the property consisting of approximately XX acres (XX hectares approx.) since before 20 September 1985. This was their main residence.

The deceased ran a business up until the early 19XX's on the property, it was then leased to another entity in the area who used the land.

The deceased passed away in 20XX

The deceased's will stated that their spouse would have a life interest in the property.

After the deceased passed away, their spouse lived in the property. The deceased's spouse surrendered their rights to the life interest on 30 January 20XX.

Upon surrender, the executors paid the deceased's spouse for their life interest with the estate's funds.

The property was advertised to be sold as soon as the executors had control of the property.

The property was sold and the contract was signed on the XX March 20XX. Settlement occurred on the XX June 20XX.

Due to the size and value of the property as well as the COVID-19 restrictions and lockdowns, the real estate agent had limited potential buyers and showing the property was difficult.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 118-195

Income Tax Assessment Act subsection 152-10(1)

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

Reasons for decision

Question 1

Subsection 118-195(1) of the ITAA 1997 provides a CGT exemption to a beneficiary or trustee of a deceased estate where a CGT event happens to a dwelling (or an ownership interest in a dwelling) acquired from a deceased estate.

An exemption is provided where the beneficiary or trustee's ownership interest in the dwelling ends within two years of the deceased's death and just before the deceased's death (for pre-CGT dwellings) the dwelling was their main residence.

The Commissioner has discretion to extend the two-year time period in subsection 118-195(1) of the ITAA 1997 where the trustee or beneficiary of a deceased estate's ownership interest ends after two years from the deceased's death.

This discretion may be exercised in situations such as where:

1. the ownership of a dwelling or a will is challenged;

2. the complexity of a deceased estate delays the completion of administration of the estate;

3. a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury); or

4. settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control.

In your case, the delay in disposing of the property is due to the complexity of the estate. As a result the settlement occurred after the two year period. Having considered the relevant facts, the Commissioner will apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit until 30 June 20XX.

Question 2

For a beneficiary or executor of a deceased estate to apply the small business CGT concessions the deceased must have been entitled to the concessions immediately before their death.

To apply the small business CGT concessions the basic conditions in subsection 152-10(1) of the ITAA 1997 must be satisfied. Paragraph 152-10(1)(b) of the ITAA 1997 requires that the event would, apart from Division 152 of the ITAA 1997, have resulted in a capital gain. When an entity disposes of a pre CGT asset the gain is disregarded and therefore this cannot be satisfied.

As the property was a pre CGT asset in the hands of the deceased, they would not have made a capital gain if they had sold it just prior to their death. Therefore, the executor is not able to apply the small business concessions to any capital gain made upon disposal of the property.