Edited version of private advice

Authorisation Number: 1052029296271

Date of advice: 16 September 2022

Ruling

Subject: CGT - small business concessions - deceased estate

Question 1

Can the deceased estate apply the small business 15-year exemption in Subdivision 152-B of the ITAA 1997 in relation to the X% share of the property that the deceased acquired on DD MM YYYY?

Answer

Yes.

Question 2

Can the deceased estate apply the small business 15-year exemption in Subdivision 152-B of the ITAA 1997 in relation to the X% share of the property that the deceased acquired on DD MM YYYY?

Answer

No.

Question 3

Can the deceased estate apply the X% discount under Division 115 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the X% share of the property that the deceased acquired on DD MM YYYY?

Answer

Yes.

Question 4

Can the deceased estate apply the small business X% reduction under subdivision 152-C of the ITAA 1997 in relation to the X% share of the property that the deceased acquired on DD MM YYYY?

Answer

Yes.

Question 5

Can the deceased estate apply the small business retirement exemption under subdivision 152-D of the ITAA 1997 in relation to the X% share of the property that the deceased acquired on DD MM YYYY?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

In YYYY, the now deceased and their then spouse purchased a property as joint tenants (the property).

The property is described as land only. The property had no dwelling on it and was never a residence.

The property was used to XXXX and XXXX for sale and the income was declared in income tax returns.

In YYYY, the spouse died, and the now deceased became the sole proprietor as surviving joint tenant.

The now deceased continued to use the property to XXXX XXXX for sale and declared the income in their tax return.

In YYYY, the now deceased began leasing the property to another XXXX and collected rent which was declared in their tax returns.

The now deceased was over 55 years when they died in YYYY.

The executors of the deceased estate continued to lease out the property to a XXXX and declared rent income in the estate's tax return.

The property was sold by the deceased estate in the YYYY financial year.

The proceeds of the sale were equally distributed between the four beneficiaries in the YYYY financial year. All the beneficiaries are Australian residents for tax purposes.

The now deceased made the choice to apply the small business retirement exemption in the YYYY financial year, to an amount less than $X.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 115-5

Income Tax Assessment Act 1997 section 115-30

Income Tax Assessment Act 1997 section 115-100

Income Tax Assessment Act 1997 section 128-50

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 Subdivision 152-D

Reasons for decision

Acquisition date

There are two distinct CGT assets that must be considered separately for the purposes of the X% discount and the small business CGT concessions.

This is because of the operation of section 128-50 of the ITAA 1997, which provides that when joint tenant dies, the surviving joint tenant is taken to have acquired the deceased individual's interest in the asset on the day that individual died.

In this case, the now deceased as surviving joint tenant to their spouse, will be taken to have acquired their spouses X% share of the property on the day their spouse died.

Applying this rule, the first CGT asset is the X% share of the property which the now deceased purchased in YYYY (the original share).

The second CGT asset is the X% share of the property which the now deceased acquired in 200XX, as the surviving joint tenant to their spouse (the acquired share).

Question 1

Summary

The deceased estate can apply the small business 15-year exemption in Subdivision 152-B of the ITAA 1997 to the capital gain arising from the sale of the X% share of the property that the now deceased acquired in YYYY.

Question 2

Summary

The deceased estate cannot apply the small business 15-year exemption in Subdivision 152-B of the ITAA 1997 to the capital gain arising from the sale of the X% share of the property that the now deceased acquired in YYYY.

Detailed reasoning

Small business CGT concessions and death

Section 152-80 of the ITAA 1997 entitles the Legal Personal Representative (LPR) of a deceased individual to access the small business CGT concessions in Division 152 in the same way that the deceased individual would have been entitled to just before their death, if the following conditions are met:

a)    A CGT asset forms part of the estate of the deceased individual.

b)    The asset devolved to the individual's LPR.

c)    The deceased individual would have been entitled to reduce or disregard a capital gain under Division 152 if a CGT event happened to the CGT asset immediately before their death.

d)    A CGT event happens in relation to the CGT asset within 2 years of the individual's death.

In this case, conditions a), b) and d) are met because the property is a CGT asset that formed part of the deceased estate and devolved to the executors of the estate under the will. CGT event A1 happened when the property was sold by the deceased estate, on the contract date. This was within 2 years of the now deceased's death.

Condition c) requires consideration of whether the now deceased would have been eligible for the small business CGT concessions in Division 152 if a CGT event happened to the property just before their death. The first step of this is a consideration of whether the basic conditions in Subdivision 152-A of the ITAA 1997 are met.

Basic conditions

Section 152-10 of the ITAA 1997 provides the following basic conditions which are a pre-requisite to all the small business CGT concessions:

a)            A CGT event happens in relation to a CGT asset in an income year.

b)            The CGT event would have resulted in a capital gain.

c)            At least one of the following applies:

a.            You are a CGT small business entity for the income year.

b.            You satisfy the maximum net asset value test.

c.            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.

d.            The conditions in subsections (1A) or (1B) are satisfied in relation to the CGT asset in the income year (about passively held assets).

d)            The CGT asset satisfies the active asset test.

In this case, if a CGT event happened just prior to the death, conditions a), b) and c) would be satisfied because the CGT event would have resulted in a capital gain, and the maximum net asset value test was met. Condition d) requires the CGT asset to satisfy the active asset test. This condition is considered below.

Active asset test

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 that is carried on by you, your affiliate or another entity that is connected with you. However, an asset is not an active asset if it is used mainly to derive rent.

An active asset will pass 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 detailed below; 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 7 ½ years during the test period detailed below.

Under subsection 152-35(2) the test period:

a)             begins when you acquired the asset, and

b)             ends at the earlier of:

i.              the CGT event, and

ii.            when the business ceased, if the business ceased in the 12 months before the CGT event

In this case, the now deceased owned the original share for over 55 years. This original share of the property was an active asset for a total of at least 7½ years in this time, because it was used to carry on a primary production business. Accordingly, the original share satisfies the active asset test.

The now deceased owned the acquired share for less than 15 years. This acquired share of the property was an active asset for a least half the period of ownership, because it was used to carry on a primary production business. Accordingly, the acquired share satisfies the active asset test.

Therefore, it is concluded that just prior to their death, the now deceased met the basic conditions for the small business CGT concessions in relation to both the original share and the acquired share of the property. The next step is to consider whether the additional requirements of the 15-year exemption are met in relation to the original share and the acquired share of the property.

The 15-year exemption

To be eligible for the 15-year exemption in Subdivision 152-B, the now deceased must have met the following requirements in relation to the original share and the acquired share of the property:

a)            The basic conditions in Subdivision 152-A are satisfied for the gain.

b)            The CGT asset was continuously owned by the individual for the 15-year period prior to the CGT event.

c)            The individual was over 55, or was permanently incapacitated, at the time of the CGT event.

Conditions a) and c) above are met. We have established above that the basic conditions were satisfied in relation to both the original share and acquired share of the property. In addition, the now deceased was over the age of 55 at the time of their death (which is the equivalent of the CGT event in this case).

In relation condition b) above, the now deceased owned the original share of the property for more than 15 years prior to their death. However, they owned their acquired share of the property for less than 15 years prior to their death.

Application to your circumstances

The deceased estate is entitled to apply the 15-year exemption to the capital gain arising from the sale of the X% share of the property that the now deceased acquired in YYYY (the original share), because all the conditions in section 152-80 of the ITAA 1997 have been met.

The deceased estate is not entitled to apply the 15-year exemption to the capital gain arising from the sale of the X% share of the property that the now deceased acquired in YYYY (the acquired share), because all the conditions in section 152-80 of the ITAA 1997 have not been met. In particular, the acquired share of the property was not owned by the now deceased for 15 years or more prior to their death.

Question 3

Summary

Yes. The deceased estate can apply the X% discount under Division 115 of the ITAA 1997 to the capital gain on the sale of the property.

Detailed reasoning

Under section 115-5 of the ITAA 1997, you make a discount capital gain if the following requirements are satisfied:

•                     You are an individual, trust, or complying superannuation entity

•                     A CGT event happens to an asset you own

•                     The CGT event happened after 21 September 1999

•                     You acquired the asset at least 12 months before the CGT event

•                     You did not choose the indexation method for calculating the cost base of the CGT asset

Section 115-30 provides that when a CGT asset is acquired by the legal personal representative (LPR) of a deceased person, the LPR is taken to have acquired the CGT asset when the deceased acquired the asset.

Application to your circumstances

In this case, all the requirements above are met in relation to the sale of the X% share of the property that the now deceased acquired in YYYY.

Question 4

Summary

Yes. The deceased estate can apply the small business X% reduction under Subdivision 152-C of the ITAA 1997 to the capital gain arising from the sale of the X% share of the property that the now deceased acquired in YYYY.

Detailed reasoning

Section 152-205 of the ITAA 1997 provides that the amount of the capital gain remaining after applying step 3 of the method statement in subsection 102-5(1) is reduced by X%, if the basic conditions in Subdivision 152-A are satisfied for the gain.

In this case, we have already established that the acquired share of the property satisfies the basic conditions in Subdivision 152-A. Therefore, as the conditions under section 152-80 of the ITAA 1997 have been satisfied, the deceased estate can apply the small business X% reduction to the capital gain made on the sale of the acquired share of the property.

Sections 152-210 and 152-220 of the ITAA 1997 provide the following information:

•                     A capital gain that is reduced by the X% reduction may also qualify for the small business retirement exemption.

•                     You have a choice of whether or not apply the X% reduction to a capital gain.

Question 5

Summary

Yes. The deceased estate can apply the small business retirement exemption under Subdivision 152-D of the ITAA 1997 to the capital gain arising from the sale of the X% share of the property that the now deceased acquired in YYYY.

Detailed reasoning

An individual can choose to disregard all or part of a capital gain if:

a)            the basic conditions in Subdivision 152-A are satisfied

b)            a written record is kept of the amount they chose to disregard (the CGT exempt amount), and

c)            if the individual is under 55 years old just before choosing to use the retirement exemption, they make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account (RSA).

If an individual is 55 years old or older when they make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or RSA.

The amount of the capital gain that an individual chooses to disregard (that is, the CGT exempt amount) must not exceed their CGT retirement exemption limit. An individual's lifetime CGT retirement exemption limit is $X reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption.

In this case, we have already established that the acquired share of the property satisfies the basic conditions in Subdivision 152-A and the now deceased was older than 55 when they died. The now deceased made the choice to apply the retirement exemption in the YYYY financial year.

Therefore, 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 capital gain made on the sale of acquired share 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 $X retirement exemption lifetime limit.