Edited version of private advice

Authorisation Number: 1051956875063

Date of advice: 3 March 2022

Ruling

Subject: CGT - small business 15-year exemption

Question

Is the deceased estate entitled to the capital gains tax small business 15-year exemption in Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997) on the sale of the property?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

The deceased purchased the property in 19XX for $YY.

The property was next door to his main residence and had an existing house on the property and a sizable yard.

The deceased had a number of business ventures both as a sole trader and through companies that were in the industry, specifically selling new and recycled parts.

The deceased never rented the property, the property was always used in his businesses as an office, for storage of parts and as an area to dismantle objects to sell their parts.

There was an office located in the house on the property, the bedrooms were fitted with shelving and used for storing parts. There was a shed on the property that was also used to store parts as was space under the house. The shed also contained a sales counter.

The deceased passed away on the DDMMYYY and was over 55.

The deceased's sole trader business was always a small business entity, as were the related companies. Combined turnover was under $2 million in recent years.

The deceased was the sole director and shareholder of the related companies.

The deceased's sole trader business operated for a period of over 8 years, and operated from the property for this entire period.

The most recent related company operated from the property for over 9 years until it was wound up in 2021.

The deceased had less than $6m in assets.

The property was sold on the DDMMYY, which is within two years of the deceased's death.

A number of invoices and documents dating back to 19XX were provided indicating the property was a place of business.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 section 152-80

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Reasons for decision

Small business capital gains tax concessions

The capital gains tax (CGT) provisions provide some small business relief in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997).

Basic conditions

To qualify for the small business CGT concessions, the basic conditions as contained in subdivision 152-A of the ITAA 1997 must be satisfied.

The basic conditions are:

•                A CGT event happens in relation to a CGT asset of yours in an income year,

•                The event would have resulted in a gain,

•                The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

•                At least one of the following applies:

•               you are a small business entity for the income year,

•               you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997,

•               you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or

•               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.

Active asset test

As outlined in subdivision 152-A of the ITAA 1997, the CGT asset must satisfy the active asset test.

Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy the active asset test if:

(a)  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 test period, or

(b)  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 7½ years during the test period.

Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

Subsection 152-40(4) of the ITAA 1997 provides some exclusions. None of the exclusions are relevant for the deceased estate.

Small business entity

An entity is a CGT small business entity if:

(a) it carries on a business in the current year, and

(b) one or both of the following applies:

(i) it carried on a business in the income year (the previous year) before the current year and its aggregated turnover for the previous year was less than $2m, and

(ii) its aggregated turnover for the current year is likely to be less than $2m (subsections 152-10(1AA) and 328-110(1) of the ITAA 1997).

Small business capital gains tax 15-year exemption

Subdivision 152-B of the ITAA 1997 outlines the conditions that need to be met for a capital gain to be disregarded under the small business 15-year exemption.

Under section 152-105 of the ITAA 1997, an individual can disregard any capital gain arising from the disposal of a CGT asset such as a property, if all of the following conditions are satisfied:

•                the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain,

•                you continuously owned the CGT asset for the 15-year period ending just before the CGT event, and

•                you are 55 or over at the time of the CGT event and the event happens in connection with your retirement.

Under section 152-80 of the ITAA 1997 the legal personal representative of a deceased estate may be eligible for small business capital gains tax (CGT) concessions in respect of the sale of the deceased's CGT asset if you make a capital gain on the asset within two years of the person's death.

The deceased estate will be eligible for the 15-year exemption to the same extent that the deceased would have been just prior to their death, except that:

•                the CGT event does not need to be in connection with the retirement of the deceased,

•                the deceased needs to have been 55 or older immediately before their death, rather than at the time of the CGT event.

In this case, the following details are relevant:

•                The deceased and a connected entity were carrying on businesess in the relevant year and satisfy the aggregated turnover requirement. Therefore, the deceased is regarded as a small business entity for Division 152 of the ITAA 1997 purposes.

•                The property was owned for over 15 years and was an active asset for more than 7.5 years.

•                The deceased satisfied the basic conditions.

•                The deceased was over 55 years of age at their death.

As the deceased was entitled to the 15-year exemption just before their death and the property was sold within two years from the date of death, the deceased estate is eligible for the 15-year exemption.

The Commissioner considers that the conditions under Subdivision 152-A and Subdivision 152-B of the ITAA 1997 are satisfied. Therefore, the deceased estate is entitled to the 15-year exemption and any capital gain made on the sale of the property is disregarded.