Edited version of private advice

Authorisation Number: 1052093278978

Date of advice: 6 March 2023

Ruling

Subject: CGT - small business concessions - deceased estate

Question

Is the deceased estate entitled to the small business capital gains tax concessions including the retirement exemption under Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the sale of the Properties?

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

The deceased passed away in 20XX over the age of 55.

Prior to their death, the deceased operated a business as a sole trader.

The deceased owned two properties that were acquired more than 10 years ago (the Properties).

The Properties were used in the carrying on of the deceased's business.

The aggregated turnover of the deceased business was less than $X million in the 20XX-XX and 20XX-XX financial years.

The Properties were sold within 2 years after the deceased's date of death.

The deceased previously used part of their CGT retirement exemption limit.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 152-80

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 subdivision 152-D

Reasons for decision

Basic conditions

To qualify for the small business capital gains tax (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 happened in relation to a CGT asset in an income year,
• The event resulted in a gain,
• The CGT asset satisfies the active asset test; and
• At least one of the following applies:
  • you are a CGT small business entity for the income year,
  • you satisfy the maximum net asset value test,
  • 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.

In this case, both properties owned by the deceased were used at all times since their purchase for the purpose of carrying on the deceased's business. Therefore, the Properties will satisfy the active asset test.

CGT small business entity

An entity is a CGT small business entity under subsection 152-10(1AA) and 328-110(1) of the ITAA 1997 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 $2 million, and

(ii) its aggregated turnover for the current year is likely to be less than $2 million.

In this case, the deceased was carrying on a business as a sole trader. Their business had an aggregated turnover of less than $2 million in the relevant years. Therefore, the deceased was a CGT small business entity immediately before their death.

Small business CGT retirement exemption

Under Subdivision 152-D of the ITAA 1997, if you are an individual, you can choose to disregard all or part of a capital gain if:

(a) you satisfy the basic conditions

(b) you keep a written record of the amount you chose to disregard (the CGT exempt amount), and

(c) if you are under the age of 55 years old just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account.

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 retirement savings account (RSA).

There is a lifetime limit of $500,000 for all choices that can be made in respect to the individuals under Subdivision 152-D of the ITAA 1997.

In this case, the deceased would have satisfied the basic conditions just prior to their death in relation to the Properties, and the deceased was older than 55 when they died. Therefore, the deceased would have been entitled to apply the small business retirement exemption to the gain from the Properties prior to their death, to the extent of their lifetime limit.

Death and small business concessions

Under section 152-80 of the ITAA 1997 the legal personal representative of a deceased estate may be eligible for small business CGT concessions in respect of the sale of the deceased's CGT asset if:

•         they make a capital gain on the asset within two years of the person's death; and

•         the asset would have qualified for the small business CGT concessions if the deceased had disposed of the asset immediately before their death.

In this case, the relevant properties were sold within two years of the deceased's date of death, both the basic conditions under Subdivision 152-A of the ITAA 1997, and the additional conditions for the retirement exemption under Subdivision 152-D of the ITAA 1997 have been satisfied. Therefore, the executors are able to apply the smallbusiness retirementexemption to the capital gain made on the sale of the Properties, in addition to, and either before or after the small business 50% reduction under Subdivision 152-C of the ITAA 1997.

The executors will be required to keep a written record of the amount disregarded under the retirementexemption and ensure the amount disregarded does not exceed the retirementexemption lifetime limit.