Edited version of private advice

Authorisation Number: 1052205387553

Date of advice: 19 December 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question 1

Will the Commissioner exercise the discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the time limit under subsection 152-80(1)(d) of the ITAA 1997 in relation to the sale of property?

Answer

Yes.

Question 2

Can the Estate apply the 15 year exemption to the sale of individual A's interest in the property acquired in 1988?

Answer

Yes.

Question 3

Can the Estate apply the 15 year exemption to the sale of individual A's interest in the property acquired from their late spouse in 2004?

Answer

No.

This private ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

Individual A and their spouse purchased a farm in 19XX.

The company as trustee for the Family Trust (the trust) operated a horse breeding, horse racing and agistment business from the date of purchase for a period of X years. Both individual A and their spouse worked in the business and income and expenses were declared by the trust.

Individual A was an income and capital beneficiary of the trust and a director of the trustee company. Individual A was also involved to a large extent in the day-to-day activities which were conducted under the trust.

The spouse passed away unexpectedly in 20XX and the farm title was changed from joint names to individual A's name only. After the spouse passed away the horse racing activity ceased but the horse breeding and agistment activities continued with income and expenses declared by the trust.

In 20XX the breeding horses reached an age where they were no longer able to breed but individual A continued to care for the ex-breeding horses to live out the remainder of their lives.

Individual A passed away on XX month XXXX and the farm was sold by the executors for their estate approximately 2 years and 1 month later.

The property was sold for $X million and was the estate's main asset.

Selling the property took considerable time. At the time of individual A's passing there were still a number of ex-breeding horses which needed to be dealt with by the executors and the property had to be prepared for sale.

The sale process took longer than expected due to the economic climate with rising interest rates, however the executors were doing everything in their control to sell within the 2 year time frame.

Individual A was over 55 years of age and satisfied the maximum net asset value test just prior their death.

The trust's activities

Profit and loss information for the trust for the 20XX year shows agistment income of $X. This was the only income reported by the trust.

There were a handful of horses on the property in 20XX. The records reported stock on hand of $X at this time.

Profit and loss information for the trust for the 20XX year shows agistment income of $X and stock on hand of $X. Income of $X was also reported in 20XX, 20XX and 20XX from agistment activities.

The stock on hand amount of $X was taken out of the profit and loss statement in the 20XX year.

Tax return information for the trust shows other business income declared from the 19XX year and the main business activity was listed as primary production.

From 20XX to 20XX the business activity listed on the tax return was horse farming and the activity changed to investing in 20XX. Income declared in the 20XX tax return consisted of other business income of $X and interest income of $X.

Similar amounts of interest income were declared each year up to the 20XX year.

In the 20XX, 20XX and 20XX years other business income of $X was declared in the trust tax returns.

The trust reported losses from the agistment activities in the 20XX to 20XX years.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-15

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

Income Tax Assessment Act 1997 section 995-1

Deceased estate and small business CGT concessions

Under section 152-80 of the Income Tax Assessment Act 1997 (ITAA 1997), the legal personal representative or beneficiary of the deceased estate will be eligible for the small business CGT concessions where:

•         the asset is disposed of within two years of the date of 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.

The two year time limit prescribed may be extended by the Commissioner in certain circumstances. 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.

Basic conditions

Subdivision 152-A of the ITAA 1997 contains the basic conditions that must be satisfied for small business CGT relief. The basic conditions, as set out in subsection 152-10(1) of the ITAA 1997 are:

(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 a gain

(c)   at least one of the following applies:

(i)      you are a small business entity for the income year

(ii)     you satisfy the maximum net asset value test

(iii)   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

(iv)   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.

(d)  the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997

Maximum net asset value test

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

(a)  the net value of the CGT asset of yours

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

(c)   the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (section 152-15 of the ITAA 1997).

Active asset test

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 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 152-35(1) of the ITAA 1997).

The test period begins when you acquired the asset and ends at the time of the CGT event (subsection 152-35(2) of the ITAA 1997).

Subsection 152-40(1) of the ITAA 1997 details 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.

Connected entity

The term 'connected with' is defined in subsection 995-1(1) of the ITAA 1997 as:

'an entity is connected with you in the circumstances described in section 328-125.'

Subsection 328-125(1) of the ITAA 1997 states 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.

Direct control of a discretionary trust may be established via either of two paths: subsection 328-125(3) or subsection 328-125(4) of the ITAA 1997.

Subsection 328-125(3) of the ITAA 1997 provides that an entity controls a discretionary trust if the trustee of that trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the entity, its affiliates, or the entity together with its affiliates.

Subsection 328-125(4) provides, in part, that an entity directly controls a discretionary trust for an income year if, for any of the preceding four income years, the discretionary trust distributed at least 40% of any income or capital paid for that year to either the entity, its affiliates, or to the entity together with any of its affiliates.

Carrying on a business

Business is defined in section 995-1 of the ITAA 1997 to be 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? outlines some factors that indicate whether or not a business of primary production is being carried on. These factors equally apply to other types of businesses. No individual factor is determinative, but should be weighed up in conjunction with the other factors.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

•         whether the activity has a significant commercial purpose or character,

•         whether the taxpayer has more than just an intention to engage in business,

•         whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity,

•         whether there is regularity and repetition of the activity,

•         whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business,

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit,

•         the size, scale and permanency of the activity, and

•         whether the activity is better described as a hobby, a form of recreation or sporting activity.

Whether a business is being carried on is a question of fact to be ascertained objectively based on the specific facts of a case (Evans v FCT (1989) 20 ATR 922 at 939; Hart v FCT (2003) 53 ATR 371). Several factors are typically relevant in making this determination (Martin v. FC of T (1953) 90 CLR 470 at 474). These indicia must be considered in combination and as a whole; no one factor is typically decisive (TR 97/11 [15]; Evans v. FC of T 89 ATC 4540).

The nature of agistment activities has been judicially considered in a number of cases which are relevant in the circumstances of this case.

'Agistment' was defined in Sinclair v Judge [1930] St R Qd 220 (Sinclair case) as "...the act of taking another's stock to graze, pasture or feed on land with an implied agreement to redeliver it to the owner on demand."

As per Taxation Ruling IT 225 Primary production - agistment income (IT 225), income derived solely from agistment will not typically constitute income from a business of primary production for tax purposes. The Australian Taxation Office (ATO) has previously used the following reasoning in prior decisions to explain the view expressed in IT 225:

"...in cases where the property is used solely for agistment, income will rarely equate to the running costs of the property, therefore lacking a commercial character. We consider that, in most cases, the agistment of the property occurs as a prelude to the use of the property for some other purpose, for example a business of primary production or private use. It is usual to apportion these cases to allow expenses to the extent of income received."

The question of whether agistment activities amount to carrying on a business was discussed in the AAT decision of Case 47/95 95 ATC 404 (Case 47/95), in which Associate Professor Fayle stated:

"Agisting another's livestock does not ordinarily constitute the carrying on of a business. Agistment fees ordinarily are in the nature of rent. However, where the land owner is charged with management, maintenance and care of the animals agisted then it is possible that the person is carrying on a business, the reward for which is the agistment fee. This is more likely if the level of the agistment fee depended on the effective management, maintenance and care of the animals." (Emphasis added).

In Case 47/95, the applicant claimed deductions for a partnership loss incurred by a partnership known as 'C Hills'. The ATO reduced these claims by $2,627 and $5,310 for each respective year on the basis that there was no business of primary production being carried on at the 400-acre (180 hectare) property owned by the partnership. The only income returned by the partnership was from agistment. There was no evidence to indicate that that partnership intended to conduct a business of primary production on the property in the future. The applicant did not provide any evidence to refute this conclusion.

The AAT determined that the agistment activities conducted in Case K53/78 78 ATC 514 amounted to carrying on a business. The taxpayer, a private company, was incorporated in June 1973 to acquire a pastoral property. At the same time a wholly owned subsidiary of the taxpayer acquired the cattle then on the land. The taxpayer agreed to permit the subsidiary to agist the cattle (approximately 7,000 head of cattle in the first year) on the property for a fixed figure per head. The agistment fee ($22,000) constituted the taxpayer's sole source of income in the year ended 30 June 1974. Both the taxpayer and the subsidiary had a common directorate which was responsible for the care and maintenance of the property and the agisted cattle and which owned an extensive area of land. It was agreed that the subsidiary would pay the insurance, rates and repairs, and be responsible for the general upkeep of the property in consideration of an agistment fee less than the rate then prevailing in the area. The taxpayer employed no labour and the workforce required from time to time to water the cattle, repair fences etc. was engaged by the subsidiary. It was admitted that the subsidiary had full and exclusive use of the property together with the plant and structural improvements.

The Chairman and Dr. Gerber both held:

"The payment was income consisting of the proceeds of a business carried on by the taxpayer and therefore constituted income from personal exertion. The payment could not be regarded as rent. The taxpayer's argument that the holding company of a wholly owned subsidiary must carry on the same business as its subsidiary must be rejected."

Dr. Beck, dissenting, ruled that "the fee received by the taxpayer was not an agistment fee. The fee was rent and it therefore constituted income from property. The taxpayer was not during the year under review carrying on primary production."

15 year exemption

An entity can disregard a capital gain from a CGT event happening to a CGT asset if:

•         the basic conditions are satisfied

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

If you are an individual you must also meet the following conditions:

•         when the CGT event happened you were permanently incapacitated or at least 55 years old and the event happened in connection with your retirement

Note the 15 year exemption can also be chosen if the deceased had met the requirements, except that it is not necessary for the CGT event to have happened in relation to the retirement of the individual.

Application to the circumstances

Question 1

In this case, we consider that the Estate provided a reasonable explanation for the delay in the disposal of the property. The current economic climate impacted the sale of the property and it was sold just outside of the two year period from individual A's death. We do not consider that allowing this request would cause the unsettling of others or that there is any mischief involved.

Accordingly, the Commissioner will exercise his discretion under subsection 152-80(3) of the ITAA 1997 to extend the time period until the date the property was sold.

Question 2

In this case, the deceased would have satisfied the basic conditions in relation to her interest in the property acquired in 1988 because:

•         the deceased would have made a capital gain had she disposed of the property just prior to their death

•         the deceased satisfied the maximum net asset value test just prior to their death

•         the interest in the property acquired in 19XX was continuously owned for more than 15 years just prior to their death

•         their interest acquired in 19XX was an active asset for more than 7 ½ years

The deceased would have also met the additional requirement under the 15 year exemption as they were over 55 years of age at the time of the CGT event.

Therefore, the Estate is entitled to disregard the capital gain made in relation to the sale of individual A's interest in the property acquired in 1988 under the 15 year exemption.

Question 3

In this case, the deceased would not have satisfied all of the basic conditions in relation to their interest in the property acquired from their late spouse in 20XX because:

•         whilst the deceased would have made a capital gain had they disposed of the property just prior to their death, and

•         the deceased satisfied the maximum net asset value test just prior to their death, and

•         the interest in the property acquired in 20XX from their late spouse was continuously owned for more than 15 years just prior to their death

•         their interest acquired in 20XX was not an active asset for more than 7 ½ years

As mentioned previously, 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.

The trust was a connected entity of individual A as they controlled the trust as director of the trustee company.

To meet the active asset test, the trust must be carrying on a business for at least 7 ½ years from the time individual A acquired the interest in the property from their late spouse in 20XX.

The trust has been undertaking horse racing, horse breeding and agistment activities since 19XX. The horse racing ceased when individual A's late husband passed away in 20XX and the horse breeding and agistment continued. From 20XX to 20XX the only income reported was $X each year from the agistment activities. During this time the agistment activities operated at a loss.

Whilst we accept the trust was carrying on a business of horse racing, horse breeding and agistment up to 20XX and horse breeding and agistment continued up to 20XX, the only activity carried on from 20XX was agistment and this activity ceased in 20XX.

In accordance with the factors in TR 97/11, and the information available to the Commissioner, the agistment activities did not have size and scale from 20XX. Based on the information provided there were only a 'handful' of horses on the property. We do not consider there was an intention to make a profit and nor did the activities have a significant commercial purpose.

Case K53/78 can also be distinguished from the trust's circumstances. The scale of the activities was far greater, with approximately XXX head of cattle as compared to a 'handful' of horses. In turn the income reported from agistment activities in Case K53/78 was also greater than the trust received and declared during the relevant period.

Case 47/95 provided that where the landowner is charged with management, maintenance and care of the animals agisted, it is possible that the person is carrying on a business, the reward for which is the agistment fee. This is more likely if the level of the agistment fee depended on the effective management, maintenance and care of the animals. Whilst we acknowledge individual A did care for the ex-breeding horses, based on the available evidence the level of agistment activities carried on by the trust between 20XX and 20XX does not constitute carrying on of a business due to the lack of size and scale, lack of significant commercial purpose or an intention to make a profit.

Further, caring for the ex-breeding horses from 20XX to 20XX, to live out the remainder of their lives, does not constitute the continuation of carrying on the horse racing, horse breeding and agistment activities.

From 20XX when individual A acquired their late spouse's interest in the property until 20XX, we accept the trust continued to carry on a business of horse breeding and agistment. However, from 20XX to 20XX the trust only carried on agistment activities which we do not consider have the size, scale or commercial purpose to constitute carrying on a business. As the property has not been used in the course of carrying on a business by a connected entity for at least 7 ½ years the property cannot satisfy the active asset test.

Individual A did not satisfy the basic conditions, just prior to their death, in relation to the interest in the property acquired from their late spouse in 20XX. Therefore, the Estate is not entitled to disregard the capital gain under the 15 year exemption.