Edited version of private advice

Authorisation Number: 1052038635595

Date of advice: 29 September 2022

Ruling

Subject: CGT - small business concessions - deceased estate

Question

Will the Commissioner, pursuant to subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997), allow an extension of time to date in 20YY?

Answer

Yes

Question

Will section 152-80 of the ITAA 1997 apply to allow the trustee to apply the CGT small business concessions to reduce or disregard the capital gain made from disposal of the Property?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commences on:

DD MM YYYY

Relevant facts and circumstances

The Deceased passed on a date in 20YY.

The Deceased owned the Property from date in 20YY.

The Property was used in a business carried on by the Deceased and another in a Partnership, up until the Property was sold.

There was a dispute, details of which have been provided, which led to delays in selling the Property. Once the dispute was resolved the Property was sold in 20YY which was more than 2 years after the Deceased's death.

The total value of the Deceased's assets at the time of the Deceased's death has been provided.

You advised that the Deceased did not have any affiliates for the purposes of the subsection 152-10(1) of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-20

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-80

Income Tax Assessment Act 1997 section 328-125

Reasons for decision

This is to explain how we reached our decision. This is not part of the private ruling.

All references made in these reasons for decision are to the Income Tax Assessment Act 1997 unless otherwise stated.

Summary

The Commissioner will allow an extension of time to date in 20YY pursuant to subsection 152-80(3), therefore section 152-80 will apply to allow the trustee to apply the CGT small business concessions to reduce or disregard the capital gain made from disposal of the Property.

Detailed reasoning

Subsection 152-80(1) provides that, section 152-80 will apply if:

(a) a CGT asset:

(i) forms part of the estate of a deceased individual; or

(ii) was owned by joint tenants and one of them dies; and

(b) any of the following applies:

(i) the asset devolves to the individual's legal personal representative;

(ii) the asset passes to a beneficiary of the individual;

(iii) an interest in the asset is acquired by the surviving joint tenant or tenants (as the case may be) as mentioned in section 128-50;

(iv) the asset devolves to a trustee of a trust established by the will of the individual; and

(c) the deceased individual referred to in subparagraph (a)(i) or (ii) would have been entitled to reduce or disregard a capital gain under this Division if a CGT event had happened in relation to the CGT asset immediately before his or her death; and

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

Paragraphs 152-80(1)(a) and (b) are satisfied, however paragraph 152-80(d) will only be satisfied if the Commissioner extends the time limit.

Extension of time

The CGT event in relation to the asset has not happened within 2 years of the Deceased's death, however the Commissioner may extend the time limit in accordance with subsection 150-80(3)

In determining whether a longer period will be allowed, the Commissioner will consider a range of factors such as:

•                     whether there is evidence of an acceptable explanation for the period of extension requested and whether it would be fair and equitable in the circumstances to provide such an extension

•                     whether there is any prejudice to the Commissioner if the additional time is allowed, however the mere absence of prejudice is not enough to justify the granting of an extension

•                     whether there is any unsettling of people, other than the Commissioner, or of established practices

•                     fairness to people in like positions and the wider public interest

•                     whether there is any mischief involved, and

•                     the consequences of the decision.

The Commissioner accepts that the complexity of the deceased estate arising from a dispute delayed completion of administration of the estate.

The granting of an extension in these circumstances, would not cause any unsettling of any persons other than the Commissioner, nor would it unsettle any established practices as the granting of an extension of time to taxpayers, dependent upon their facts, is itself an established practice.

It would not result in any amount of unfairness to people in similar circumstances or like positions. The availability to apply for an extension of time, in the same manner, is available to all people with similar circumstances.

There is no mischief involved, the Property was sold soon after the dispute was resolved.

Consequently, the period is extended to date in 20YY.

Paragraph 152-80(1)(c)

The basic conditions in section 152-10 would have been satisfied by the Deceased in relation to the hypothetical 'capital gain' referred to in paragraph 152-80(1)(c).

Subsection 152-10(1) provides:

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 (see section 152-15);

(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).

Paragraphs 152-10(1)(a) and (b) would have applied to the Deceased.

In relation to paragraph 152-10(1)(c), the maximum net asset test in accordance with section 152-15:

You satisfy the maximum net asset value test if, just before the *CGT event, the sum of the following amounts does not exceed $6,000,000

(a) the net value of the CGT assets of yours;

(b) the net value of the CGT assets of any entities connected with you;

(c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)).

Subsection 328-125(1) provides that:

An entity is connected with another entity if:

(a) either entity controls the other entity in a way described in this section; or

(b) both entities are controlled in a way described in this section by the same third entity.

Relevantly, subsection 328-125(2) provides that:

An entity controls another entity if the first entity, its *affiliates, or the first entity together with its affiliates:

(a) except if the other entity is a discretionary trust - own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of:

(i) any distribution of income by the other entity; or

(ii) if the other entity is a partnership - the net income of the partnership; or

(iii) any distribution of capital by the other entity; ...

The Deceased would have met the maximum net asset test and satisfied paragraph 152-10(1)(c).

Lastly, the Property would have had to meet the active asset test to satisfy paragraph Paragraphs 152-10(1)(d).

In accordance with section 152-35:

(1) A CGT asset satisfies 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 period specified in subsection (2); 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 period specified in subsection (2).

(2) The period:

(a) begins when you acquired the asset; and

(b) ends at the earlier of:

(i) the CGT event; and

(ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

The meaning of active asset is set out in section 152-40. Relevantly it states that:

(1) A CGT asset is an active asset at a time if, at that time:

...held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

(i) you; or

(ii) your affiliate; or

(iii) another entity that is connected with you; or

(4) However, the following *CGT assets cannot be active assets:

(e) an asset whose main use by you is to derive interest, an annuity, rent, royalties or foreign exchange gains unless:

(i) ... or

(ii) its main use for deriving rent was only temporary.

Guidance in relation to the issue of main use is provided in Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent?

The Property was used by the partnership in its business for the relevant period, therefore paragraph 152-10(1)(d) is satisfied as it meets the active asset test.

As the Deceased would have met the basic conditions in section 152-10, the Deceased would have been entitled to reduce or disregard a capital gain under this Division 152 in relation to the hypothetical capital gain thus satisfying paragraph 152-80(1)(c).

As a result, all the requirements in subsection 152-80(1) are met and section 152-80 will apply to allow the Trustee to apply the CGT small business concessions to reduce or disregard the capital gain made from disposal of the Property