Edited version of private advice

Authorisation Number: 1052030981409

Date of advice: 9 September 2022

Ruling

Subject: Capital gains tax 15 year exemption

Question 1

Do you meet the conditions to apply the small business 15-year exemption for Lot A under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard the capital gain made on the disposal of the property?

Answer

Yes.

Question 2

Do you meet the conditions to apply the small business 15-year exemption for Lot B under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard the capital gain made on the disposal of the property?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2022

The scheme commences on:

1 July 2021

Relevant facts and circumstances

In 200A/200B financial year a family member (the Deceased) passed away.

The Deceased died leaving a Will.

The probate was granted in December 200A.

The Deceased's Will appointed executors who were family members of the Deceased.

The beneficiaries of the estate are all family members of the Deceased.

The Deceased owned multiple properties with multiple lots within the one property.

The Deceased passed different Lots to each of the beneficiaries.

There was a dispute with the Will and an agreement was made between the family members that Lot A would go to you as the beneficiary as that property had been left to you in the Will.

An agreement between the family members was also made with Lot B which had passed to the other family members in the Will. It was agreed on that you would purchase each of their one quarter share in that Lot.

The transfer of Lot B occurred in the 20CC/DD financial year.

The property sold consists of XX Lots.

The property was sold in the 2021/22 financial year.

You meet the small business basic conditions.

You have retired upon the sale of the property and are over 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 109-55

Income Tax Assessment Act 1997 subsection 128-15

Income Tax Assessment Act 1997 section 128-20

Income Tax Assessment Act 1997 section 152-105

Reasons for decision

Small business 15-year exemption

In accordance with section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) you can disregard a capital gain from a CGT event happening to a CGT asset if you:

•                    satisfy the basic conditions for the CGT small business concessions

•                    continuously owned the CGT asset for the 15-year period ending just before the CGT event happened.

If you are an individual, you must have been:

•                    at least 55 years old and the CGT event happened in connection with your retirement, or

•                    permanently incapacitated at the time of the CGT event.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it isn't necessary for there to be a permanent and everlasting retirement from the workforce.

You have stated that you satisfy the basic conditions for the CGT small business concessions, you are over 55 years old and it is accepted that you are retiring. Therefore, it needs to be determined as to whether you continuously owned the two lots in question for 15 years. Since we know when you disposed of the lots, we need to ascertain when they were acquired.

Acquisition of CGT assets

Division 109 of the ITAA 1997 states you generally acquire a CGT asset when you become its owner. You can also acquire a CGT asset:

•                    as a result of a CGT event happening;

•                    in other circumstances.

The most common event is CGT Event A1 which occurs when an entity disposes of a CGT asset to you. You are considered to have acquired the asset when the disposal contract is entered into or, if none, when the entity stops being the asset's owner.

Section 109-55 of the ITAA 1997 lists specific CGT provisions which also deal with when an asset is acquired and at Item 2 refers to section 128-15 for situations where a CGT asset passes to a beneficiary of a deceased estate. The beneficiary is considered to have acquired that asset when the individual died.

Effect of death

Division 128 of the ITAA 1997 sets out how capital gains and losses are dealt with and how this affects the legal personal representative (LPR) or beneficiary of the estate.

Subsection 128-15(1) of the ITAA 1997 sets out what happens if a CGT asset owned by a deceased person just before dying that:

(a) devolves to your LPR; or

(b) passes to a beneficiary in your estate.

Subsection 128-15(2) of the ITAA 1997 provides that the LPR, or beneficiary, is taken to have acquired the asset on the day you died.

Section 128-20 of the ITAA 1997 defines when a 'CGT asset passes to a beneficiary' in a person's estate.

Subsection 128-20(1) of the ITAA 1997 provides a CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset:

(a)          under your will, or that will as varied by a court order; or

(b)          by operation of an intestacy law, or such a law as varied by a court order; or

(c)           because it is appropriated to the beneficiary by your legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate; or

(d)          under a deed of arrangement if:

(i)            the beneficiary entered into the deed to settle a claim to participate in the distribution of your estate; and

(ii)           any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other *CGT assets that formed part of your estate.

Application to your circumstances

In your case, as per the agreement made with your family members, it is accepted that Lot A was mistakenly left off the Will and was always considered to form part of the property. Therefore, it is considered that Lot A passed to you on the day the deceased died as per section 128-20. You have met the basic conditions for the CGT small business concessions and have owned the asset continuously for more than 15 years since we considered you to have acquired that lot on the day the deceased died. As you are over 55 years of age, you will be eligible for the 15 year exemption concession when you retire in relation to the disposal of Lot A during the 2021/22 year of income.

As for Lot B, this has passed to your family members in the Will and then you have made an agreement to purchase each of their share of the Lot from them. This is a CGT Event A1 and under the acquisition rules in subsection 109-5(2), you are considered to have acquired the lot when the contract to acquire it was entered into. The acquisition date will therefore by 15 July 2009. As you have not held Lot B for 15 years you will not be eligible for the small business 15 year exemption concession in relation to the disposal of that lot, however other concessions that you may be eligible for are the small business 50% active asset reduction concession and the small business retirement exemption concession.