Edited version of private advice

Authorisation Number: 1051978080271

Date of advice: 2 May 2022

Ruling

Subject: Extension of time to claim small business 15-year exemption - executor of deceased estate

Question

Will the Commissioner exercise the discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the time limit under paragraph 152-80(1)(d) of the ITAA 1997 in relation to the sale of a property by the Executor of a deceased estate, to enable the Executor to claim the small business 15-year exemption under Subdivision 152-B of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.            The deceased died in 20XX and was over the age of 55.

2.            At the time of death, the deceased held a property. The property was purchased in 20XX for and was used by the deceased to carry on a business in the deceased's own name.

3.            In 20XX the cattle were moved from the deceased's name into a trust. From then until 20XX a manager was paid to run the business.

4.            At the date of death, the deceased, affiliates and connected entities held net CGT assets to the value of less than $X million that included the property.

5.            Following the deceased's death, the Will was contested. The relevant parties signed a Deed of Family Arrangement (DFA). The DFA named a Trustee for the Estate (the Executor) who was responsible for applying for a grant of probate. Probate was granted in 20XX by a Court Order.

6.            Valuations of the property were completed in 20XX with the intention of selling the property. At this time Covid-19 lockdowns were occurring, hindering the ability of the Executor to arrange inspections by potential purchasers.

7.            The Executor entered into a contract for the sale of the property in 20XX, which was more than two years since the date of death.

Information provided

8.            The Applicant has provided information in a number of documents including:

(a)          the private ruling application

(b)          emails to the Australian Taxation Office

(c)           Will

(d)          Deed of Family Arrangement

(e)          Contract for the sale and purchase of the property

(f)            Asset List

(g)          Trust Deed

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 Subsection 152-10(1)

Income Tax Assessment Act 1997 Paragraph 152-10(1)(a)

Income Tax Assessment Act 1997 Paragraph 152-10(1)(b)

Income Tax Assessment Act 1997 Subparagraph 152-10(1)(c)(ii)

Income Tax Assessment Act 1997 Paragraph 152-10(1)(d)

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Subsection 152-35(1)

Income Tax Assessment Act 1997 Subsection 152-35(2)

Income Tax Assessment Act 1997 Paragraph 152-40(1)(a)

Income Tax Assessment Act 1997 Section 152-80

Income Tax Assessment Act 1997 Subparagraph 152-80(1)(a)(i)

Income Tax Assessment Act 1997 Subparagraph 152-80(1)(b)(i)

Income Tax Assessment Act 1997 Paragraph 152-80(1)(c)

Income Tax Assessment Act 1997 Paragraph 152-80(1)(d)

Income Tax Assessment Act 1997 Paragraph 152-80(2)(a)

Income Tax Assessment Act 1997 Paragraph 152-80(2A)(a)

Income Tax Assessment Act 1997 Subsection 152-80(3)

Income Tax Assessment Act 1997 Section 152-105

Income Tax Assessment Act 1997 Paragraph 152-105(a)

Income Tax Assessment Act 1997 Paragraph 152-105(b)

Income Tax Assessment Act 1997 Paragraph 152-105(c)

Income Tax Assessment Act 1997 Paragraph 152-105(d)

Income Tax Assessment Act 1997 Subparagraph 152-105(d)(i)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise noted.

Question

Will the Commissioner exercise the discretion under subsection 152-80(3) to extend the time limit under paragraph 152-80(1)(d) in relation to the sale of a property by the Executor of a deceased estate, to enable the Executor to claim the small business 15-year exemption under Subdivision 152-B?

Summary

The Commissioner will exercise the discretion to extend the two year time limit for the sale of the Property under paragraph 152-80(1)(d), to enable the Executor to claim the small business 15-year exemption under Subdivision 152-B.

Detailed reasoning

1.            Section 152-80 allows the legal personal representative of a deceased individual to apply for small business relief in respect of the sale of a deceased's CGT asset(s) where the following conditions are satisfied:

•                     the CGT asset forms part of the estate of the deceased individual[1]

•                     the CGT asset devolves to the legal personal representative of the deceased individual[2]

•                     the deceased would have been entitled to reduce or disregard a capital gain under Division 152 if a CGT event had happened in relation to the CGT asset immediately before his or her death,[3] and

•                     a CGT event happens in relation to the CGT asset within two years of the individual's death.[4]

The CGT asset forms part of the estate of the deceased individual

2.            The deceased held the Property at the time of death in 20XX. Land is specifically included in the definition of a CGT asset.[5] As the Property formed part of the deceased's estate, this condition is satisfied

The CGT asset devolves to the legal personal representative of the deceased individual

3.            A legal personal representative is defined to include an executor or trustee of a deceased estate.[6] As the Hillview property devolved to the Executor, this condition is satisfied.

The deceased would have been entitled to disregard a capital gain if a CGT event had happened in relation to the CGT asset immediately before his or her death

4.            This condition requires an examination of the extent to which the deceased would have been able to claim small business relief if a CGT event happened in relation to Hillview immediately before his death.

5.            Division 152 provides small business relief to allow eligible taxpayers to disregard or defer some or all of a capital gain arising from the disposal of an active asset used in a small business, provided certain conditions (the basic conditions) are met. Subsection 152-10(1) sets out the basic conditions to be satisfied before a taxpayer can access relief.

6.            Subsection 152-10(1) states:

A *capital gain (except a capital gain from *CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:

(a)          a *CGT event happens in relation to a *CGT asset of yours 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 *CGT small business entity for the income year;

(ii)           you satisfy the maximum net asset value test;

(iii)          you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership;

(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 (see section 152-35).

7.            Since section 152-80 examines what happens if a CGT event had happened in relation to an individual's CGT asset immediately before his or her death, the condition in paragraph 152-10(1)(a) is satisfied.

8.            The second condition in paragraph 152-10(1)(b) is satisfied, as a capital gain would have been made if a CGT event happened at that time.

9.            In relation to the third condition in paragraph 152-10(1)(c), the Applicant has advised that the total net value of the assets held, including connected and affiliated entities, was below $6 million. Hence, the maximum net asset value test in section 152-15 is satisfied, resulting in the third condition in subparagraph 152-10(1)(c)(ii) being satisfied.

10.          The final condition in paragraph 152-10(1)(d) requires the CGT asset to satisfy the active asset test in section 152-35.

11.          Subsection 152-35(1) relevantly states:

A CGT asset satisfies the active asset test if:

(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 period specified in subsection (2).

12.          Subsection 152-35(2) states the period begins when you acquired the asset and ends the earlier of when the CGT event happens, or the relevant business ceased.

13.          The deceased owned the Property for more than 15 years. To satisfy the active asset test, the property must also have been an active asset of his for at least 7½ years.

14.          A CGT asset is an active asset if you own the asset and it is used, or held ready for use, in the course of carrying on a business.[7] The deceased conducted a business on the Property. Therefore, the Property is considered to have been an active asset of the deceased.

15.          As the deceased held the Property for more than 15 years and it was an active asset for at least 7½ years during that period, the Property will satisfy the active asset test in paragraph 152-10(1)(d).

16.          The deceased will therefore satisfy all the basic conditions in subsection 152-10(1) immediately before death.

Small business 15-year exemption

17.          There are four small business concessions available. The Executor is seeking to apply the small business 15-year exemption in Subdivision 152-B, which takes priority over the other small business concessions. If the small business 15-year exemption applies, the entire capital gain is disregarded, so there is no need to consider any of the other concessions.

18.          Section 152-105 states:

If you are an individual, you can disregard a *capital gain arising from a *CGT event if all of the following conditions are satisfied:

(a) the basic conditions in Subdivision 152-A are satisfied for the gain;

(b) you continuously owned the *CGT asset for the 15-year period ending just before the CGT event;

(c) if the CGT asset is a *share in a company or an interest in a trust - the company or trust had a *significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset;

(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.

19.          As discussed above, the basic conditions in subsection 152-10(1) are satisfied, thus the first condition in paragraph 152-105(a) is satisfied.

20.          The deceased owned the Property continuously for approximately over 15 years immediately before death. Therefore, the second condition in paragraph 152-105(b) is satisfied.

21.          The third condition in paragraph 152-102(c) is not relevant to this case as the asset is neither shares nor an interest in a trust.

22.          At the time of death, the deceased was aged over 55. The fourth and final condition in subparagraph

23.          152-105(d)(i) requires the CGT event to happen in connection with his retirement. However, this condition is modified by paragraphs 152-80(2)(a) and 152-80(2A)(a) which allows the legal personal representative of the deceased individual to reduce or disregard a capital gain in the same way as the deceased individual would have been entitled to as if:

paragraph 152-105(d) only required the deceased individual to have been 55 or over, or permanently incapacitated, at the time of the *CGT event referred to in paragraph (1)(c) of this section.

24.          In other words, there is no requirement that a CGT event happened in connection with the deceased's retirement, only that the deceased individual be aged 55 or over at the time of death. Therefore, the fourth and final condition in paragraph 152-105(d) is satisfied.

25.          The deceased would have satisfied all requirements in section 152-105 immediately before death and would have been able to apply the small business 15-year exemption to disregard the capital gain if a CGT event had happened immediately before death.

A CGT event happens in relation to the CGT asset within two years of the individual's death

26.          The Executor did not dispose of the Property within two years of the date of the deceased's death. However, the Executor may apply to have the Commissioner extend the time limit .[8]

27.          In this instance the Commissioner has given consideration to the contesting of the deceased's will, the interruption caused by the Covid-19 pandemic and consequent lockdowns and considers them to be acceptable explanations for the period of extension requested. It should be noted that once probate was granted the property was sold within two years. The Commissioner considers it appropriate to extend the time beyond two years.

Conclusion

28.          The granting of the Commissioner's discretion results in the requirements of subsection 152-80(1) being satisfied. The Executor will be entitled to disregard the capital gain made from disposing of the Property via the operation of Subdivision 152-B.

[1] Subparagraph 152-80(1)(a)(i)

[2] Subparagraph 152-80(1)(b)(i)

[3] Paragraph 152-80(1)(c)

[4] Paragraph 152-80(1)(d)

[5] Note 1 in section 108-5

[6] Subsection 995-1(1)

[7] Paragraph 152-40(1)(a)

[8] subsection 152-80(3)