Edited version of private advice

Authorisation Number: 1052160924754

Date of advice: 14 September 2023

Ruling

Subject: CGT - deceased estates

Question 1:

Would the deceased have been entitled to reduce or disregard a capital gain under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) arising from their interest in the Property acquired from their late spouse, had a CGT event had happened to this interest immediately before their death?

Answer

No

Question 2:

Will the Commissioner exercise discretion under subsection 152-80(3) of the ITAA 1997 to allow an extension of time for the Executors to apply the small business 15-year exemption arising from the sale of the interest in the Property originally acquired by the deceased?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2023

Year ending 30 June 2024

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

The deceased and their late spouse purchased the Property as joint tenants after 20 September 1985 and used it in a business they ran in partnership.

The deceased's late partner passed away more than 15 years ago, and their share of the Property was transferred to the deceased by way of survivorship.

The deceased continued to use the Property for 3 years after the death of their late spouse.

The Property was subsequently rented to third parties who were not affiliates of or connected to the deceased.

At the time of their death, the deceased had held their original interest in the Property for more than 30 years and their interest acquired by way of survivorship for just under 15 years.

Extenuating family circumstances have delayed the sale of the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-80

Reasons for decision

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

Question 1

Summary

The deceased would not have been entitled to apply the CGT small business concessions on the interest they acquired by way of survivorship if a CGT event had happened to this interest immediately before their death. Consequently, the Executors are not entitled to reduce or disregard the capital gain arising from the sale of this interest under section 152-80, as paragraph 152-80(1)(c) is not satisfied.

Detailed reasoning

Section 152-80 allows the legal personal representative of an estate to apply the CGT small business concessions in respect of the sale of the deceased's asset in certain circumstances.

Specifically, the following conditions must be met:

•         The asset devolves to the legal personal representative (subparagraph 152-80(1)(a)(i) and subparagraph 152-80(1)(b)(i)).

•         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 asset immediately before their death (paragraph 152-80(1)(c)).

•         A CGT event happens within two years of the deceased's death (paragraph 152-80(1)(c)) unless the Commissioner extends the time period in accordance with subsection 152-80(3).

The deceased entitlement to reduce or disregard a capital gain under Division 152 requires them to have satisfied the basic conditions for small business relief in Subdivision 152-A, if a CGT event had happened in relation to the asset immediately before their death.

Subsection 152-10(1) sets out the basic conditions that need to be satisfied including that the CGT asset satisfies the active asset test in section 152-35.

Active asset test

Under subsection 152-35(1), 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.

152-35(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.

Subsection 152-40(1) 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 (whether alone or in partnership), or your affiliate, or another entity that is connected with you.

Subsection 152-40(4) lists CGT assets that cannot be active assets. Under paragraph 152-40(4)(e), an asset whose main use is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary.

For the purpose of paragraph 152-40(4)(e) your personal use of the CGT asset is disregarded and any use by an affiliate of or and entity that is connected to you is considered to be your use.

Application to the interest in the Property the decease acquired by way of survivorship

Active asset test period

The deceased ownership period of the interest acquired by way of survivorship was for a period of just less than 15 years. Due to the extended length of time between the cessation of the deceased business and their death, there is no basis for the Commissioner to shorten the active asset test period under subparagraph 152-35(2)(b)(ii). The active asset test period for this interest will remain the ownership period.

Period the interest was an active asset of the deceased

The deceased business use of the survivorship interest commenced on their late spouse's death and ceased after approximately 3 years. After this time, the use of the Property by the deceased was to lease it to third party entities. From the cessation of the deceased business, the rental exclusion in paragraph 152-40(4)(e) applied and the Property was not an active asset of the deceased for the purpose of the active asset test.

As the business use period of approximately 3 years, is less than half of the test period of nearly 15 years, the interest in the Property the deceased acquired by way of survivorship does not satisfy the active asset test.

It follows that the deceased would not have been entitled to apply the CGT small business concession on the interest acquired by way of survivorship if a CGT event had happened to this interest immediately before their death. The Executors are not entitled to reduce or disregard the capital gain arising from the sale of this interest under section 152-80, as paragraph 152-80(1)(c) is not satisfied.

Question 2

Summary

The Commissioner will exercise his discretion under subsection 152-80(3) and extend the 2-year time period so that the Executors can apply the CGT small business concessions in relation to the disposal of the interest in the Property that was originally acquired by the deceased.

Detailed reasoning

In determining whether the 2-year time limit will be extended the Commissioner can consider the factors including:

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

•         prejudice to the Commissioner which may result from the additional time being allowed (but the mere absence of prejudice is not enough to justify the granting of an extension)

•         unsettling of people, other than the Commissioner, or of established practices

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

•         whether any mischief is involved, and

•         consequences of the decision.

Having regard to these factors, the Executors have provided evidence explaining the reasons of why an extension of the 2-year time limit is required. In the circumstances, the period of the extension you have requested is considered fair and reasonable and the Commissioner will exercise the discretion under subsection 152-80(3) to extend the statutory time limit.