Edited version of private advice

Authorisation Number: 1052206461756

Date of advice: 21 December 2023

Ruling

Subject: CGT - small business relief

Question

Will the Commissioner exercise the discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the 2 year time limit in paragraph 152-80(1)(d) of the ITAA 1997 by which CGT event A1 under section 104-10 of the ITAA 1997 happens in relation to Property A?

Answer

Yes, the time limit in paragraph 152-80(1)(d) of the ITAA 1997 is extended to apply to the disposal of Property A on xx September 2023.

This ruling applies for the following period:

Income year ending 30 June 2024

Relevant facts and circumstances

1.    Mr A died in Month 20XX.

2.    At the time of Mr A's death, he owned various properties including Property A and Property B.

3.    Property A and Property B were registered under separate land titles and shared a boundary.

4.    In early 20XX, Mr A engaged land surveyors to prepare a subdivision plan and submit an application to the Council with a view to re-align the shared boundary between Property A and Property B.

5.    In March 20XX the Council acknowledged acceptance of the development application and in May 20XX the Council granted the development consent for the subdivision of Property A and Property B.

6.    Pursuant to Mr A's will and subject to the payment of $X being made to the trustee of the Mr A Testamentary Trust No. 1, a one-fourth share of Property A was to be held by each of the trustees of the Mr A Testamentary Trust No. 2, Mr A Testamentary Trust No. 3, Mr A Testamentary Trust No. 4 and Mr A Testamentary Trust No. 51 as tenants in common for the purposes of continuing the family business.

7.    In December 20XX, a grant of probate was issued.

8.    In April 20XX, the draft subdivision plan accompanied with the Transmission Application were sent to the secured creditor to seek consent. In May 20XX, the executor and trustee of Mr A's will (the Trustee), received approval from the secured creditor conditional upon the Trustee providing new mortgages, a new guarantee from the executor and Deed of Consent and Indemnity executed by the Testamentary Trust beneficiaries.

9.    Between June 20XX and October 20XX, various professionals were engaged by the Trustee to provide advice regarding aspects of the subdivision plan and subsequent appropriation of assets under the will.

10.  In October 20XX, the Testamentary Trust beneficiaries provided verbal consent to the Trustee to finalise the proposed subdivision plan. At this time, the Trustee sought an updated land survey and the draft subdivision plan was amended accordingly.

11.  In February 20XX, one of the Testamentary Trust beneficiaries disclaimed their interest in Property A.

12.  Between April 20XX and November 20XX, the Trustee sought and obtained advice regarding the stamp duty implications associated with the subdivision plan.

13.  In February 20XX, the Trustee received an executed Boundary Adjustment Deed of Consent from the Testamentary Trust beneficiaries.

14.  In March 20XX, the land title for Property A was transferred to the Trustee.

15.  In March 20XX, the surveyor lodged the subdivision plan with New South Wales Land Registry Services. In April 20XX, the subdivision plan was registered.

16.  In May 20XX, one of the remaining Testamentary Trust beneficiaries withdrew their participation in the family business to be operated on Property A.

17.  Under the terms of the will the Trustee required the consent of the 4 Testamentary Trust beneficiaries to be able to deal with Property A, and the beneficiaries notified the Trustee that they would withhold their consent until a number of issues had been addressed. Those issues included whether the beneficiaries desired to receive an interest in agricultural property, who would guarantee the family's secured debts and how the family's business would continue to operate.

18.  The boundary adjustment could not be completed until these issues were resolved.

19.  Ultimately, the Testamentary Trust beneficiaries could not agree on a workable arrangement for the ongoing management of the family business, nor were they willing to provide personal guarantees for the existing secured debt and, as affirmed at a family meeting held in May 2023, instructed the Trustee to sell Property A.

20.  In May 20XX a property sales agent was engaged and Property A was sold at auction on xx September 20XX.

21.  Throughout the process, and in addition to the administrative workload, the Trustee was responsible for the maintenance of the estate's assets and the management of the estate's properties during periods of significant drought and bushfires. Restrictions imposed on 'non-essential' travel due to COVID-19 caused further delays and created additional challenges.

22.  The Trustee is seeking the Commissioner's discretion under subsection 152-80(3) of the ITAA 1997 to extend the statutory time period set out under paragraph 152-80(1)(d) of the ITAA 1997 to apply to the disposal of Property A on xx September 2023.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-80

Income Tax Assessment Act 1997 paragraph 152-80(1)(a)

Income Tax Assessment Act 1997 paragraph 152-80(1)(b)

Income Tax Assessment Act 1997 paragraph 152-80(1)(c)

Income Tax Assessment Act 1997 paragraph 152-80(1)(d)

Income Tax Assessment Act 1997 subsection 152-80(3)

Reasons for decision

All subsequent legislative references are to the ITAA 1997.

Summary

The Commissioner will exercise the discretion under subsection 152-80(3). The time limit in paragraph 152-80(1)(d) of the ITAA 1997 is extended to apply to the disposal of Property A on xx September 2023.

Detailed reasoning

Section 152-80 allows the trustee of a trust established by the will of a deceased individual to reduce or disregard a capital gain under Division 152 where2:

• a CGT asset forms part of the estate of the deceased individual;
• the asset devolves to that trustee;
• the deceased individual would have been entitled to reduce or disregard a capital gain under Division 152 if a CGT event had happened in relation to the CGT asset immediately before their death; and
• a CGT event happens in relation to the asset within 2 years of the individual's death, unless the Commissioner extends that time limit in accordance with subsection 152-80(3).

Application to the Trustee's circumstances

By way of a grant of probate following the death of Mr A, the Trustee obtained an authorisation to administer the deceased estate comprising (in part) Property A.

The disposal of Property A did not occur within 2 years of the death of Mr A, thereby exceeding the statutory time limit under paragraph 152-80(1)(d). Consequently, in the event Mr A would have been entitled to reduce or disregard a capital gain under Division 152 if Property A had been sold immediately before his death, the Trustee is nevertheless not eligible to access any available small business CGT concessions to a capital gain arising from the sale of Property A unless the Commissioner extends the time by which the sale could happen to at least XX September 2023.

In determining whether the discretion to allow further time would be considered pursuant to subsection 152-80(3), the Commissioner has considered the following factors3:

• 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);
• 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.

It is reasonable to conclude that the complexities involved in administering the estate and, specifically, the delay in the sale of Property A necessitated by the need to register the subdivision plan and to resolve all outstanding issues raised by the Testamentary Trust beneficiaries in respect of the will, were extenuating factors outside the control of the Trustee.

It is also noted that Property A was immediately marketed and subsequently sold by the Trustee upon resolution of all extenuating factors and receipt of the Testamentary Trust beneficiaries' instructions to do so.

There is no evidence of mischief and it is accepted that if the extension of time is granted, the exercise of the discretion will not prejudice the Commissioner, nor cause any unsettling of people or of established practices.

Having regard to these circumstances, it is considered appropriate for the Commissioner to exercise the discretion under subsection 152-80(3) to extend the time limit by which the sale of Property A by the Trustee could happen to XX September 20XX.

1 For the purposes of this ruling, collectively referred to as the Testamentary Trusts.

2 Paragraphs 152-80(1)(a) to (d).

3 Hunter Valley Developments Pty Ltd and Ors v Cohen (1984) 3 FCR 344.