Edited version of private advice

Authorisation Number: 1052218394415

Date of advice: 5 February 2024

Ruling

Subject:CGT - small business

Question 1

Will the Commissioner exercise his discretion not to apply the provisions of section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) and assess the trust estate under section 99 of the ITAA 1936?

Answer

Yes.

Question 2

Will the Commissioner exercise his discretion to extend the time limit allowed under section 152-80(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as provided for under section 152-80(3) of the ITAA 1997?

Answer

Yes.

Question 3

Will the proposed sale of the property qualify for exemption from capital gains tax under the 15-year exemption?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Person X (the deceased) purchased a property in 19XX.

The deceased operated a business.

The deceased passed away on XX/XX/20XX.

The business operated up until the deceased passed away.

The executor of the estate has been prevented from dealing with the assets of the estate due to a life tenancy which was granted in the will of the deceased over the principal asset of the estate (the property).

The life tenancy was granted to the deceased's spouse Person Y (the life tenant).

The life tenancy ended due to the death of the life tenant on XX/XX/20XX.

The executors of the estate are now in the process of preparing the property for sale to finalise the estate.

The estate has balances in various bank accounts.

The estate does not hold any shares in private companies and has not received or made any loans.

The estate has not been fully administered, therefore there is no income to which a beneficiary is presently entitled.

The trustee was receiving income from the business.

No additional assets were transferred into the deceased estate.

The deceased satisfied the maximum net value asset test.

The deceased was over 55 at the time of their passing.

Assumptions

For the purposes of this ruling, the following assumptions have been made.

Throughout the Ruling Period:

•         The assets held by the trustee will consist of:

-       assets vested in them (as executor of the Will and listed in the Inventory of Property annexed to the Grant of Probate document) under the terms of the Last Will and Testament of the deceased;

-       cash earned from holding these assets; and

-       cash from the sale of these assets of the estate.

•         The assets held by the trustee will not consist of:

-       investments in any private companies or private trusts;

-       other assets acquired at non-arm's length value; or

-       loans provided to related parties.

•         The trustee will not avoid tax by exercising the powers available to them under the terms of the Last Will and Testament of the deceased.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 subsection 99A(2)

Income Tax Assessment Act 1936 subsection 99A(3)

Income Tax Assessment Act 1997 section 152-80(1)

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

Income Tax Assessment Act 1997 section 152-105

Reasons for decision

Section 99A of the ITAA 1936 applies in the case of trust estates of deceased persons unless the Commissioner, pursuant to subsection 99A(2) of the ITAA 1936, forms the opinion that it would be unreasonable for section 99A of the ITAA 1936 to apply in relation to the deceased estate in relation to the particular years of income.

In exercising the discretion, the Commissioner will have reference to the text of the legislation itself, the intent or purpose of the legislation and relevant case law as they apply to the facts and circumstances of a particular case for the purpose of forming the required opinion under subsection 99A(2) of the ITAA 1936.

The types of trust estate in respect of which the Commissioner's discretion may be exercised are listed in paragraphs 99A(2)(a) to (d) of the ITAA 1936 and include a trust estate that resulted from a will (paragraph 99A(2)(a) of the ITAA 1936).

In forming the opinion for the purposes of subsection 99A(2) of the ITAA 1936 the Commissioner is required to have regard to the matter subsections 99A(3) and (3A) of the ITAA 1936 as follows:

99A(3) In forming an opinion for the purposes of subsection (2):

(a)  the Commissioner shall have regard to the circumstances in which and the conditions, if any, upon which, at any time, property (including money) was acquired by or lent to the trust estate, income was derived by the trust estate, benefits were conferred on the trust estate or special rights or privileges were conferred on or attached to property of the trust estate, whether or not the rights or privileges have been exercised;

(b)  if a person who has, at any time, directly or indirectly:

(i) transferred or lent any property (including money) to, or conferred any benefits on, the trust estate; or

(ii) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of the trust estate whether or not the right or privilege has been exercised;

has not, at any time, directly or indirectly:

(iii) transferred or lent any property (including money) to, or conferred any benefits on, another trust estate; or

(iv) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of another trust estate, whether or not the right or privilege has been exercised;

the Commissioner shall have regard to that fact; and

(c)  the Commissioner shall have regard to such other matters, if any, as they think fit.

99A(3A) For the purposes of the application of paragraph (3)(a) in relation to a trust estate of the kind referred to in paragraph (2)(a), a reference in that first-mentioned paragraph to the trust estate shall be read as including a reference to the person as a result of whose death the trust estate arose.

Application to your situation

•         The estate is a deceased estate that resulted from the will of the deceased, which satisfies the requirement of paragraph 99A(2)(a).

•        The estate is still in the 'period of administration' (per Taxation Ruling IT 2622) such that no beneficiary has been made presently entitled to the income of the estate.

•         The estate has not been fully administered at this point due to the deceased's assets not all being dealt with because of the life tenancy which was granted in the will of the deceased over the principal asset of the estate.

•         The trustee has not, and will not, use their powers under the will to avoid tax, the trustee is the executor of a deceased estate, and has exercised their powers under the will in a conventional manner (and not as a tax-avoidance device); and the estate is a deceased estate wherein the assets of the deceased are being administered in a conventional manner.

Having regard to the above matters, and the legislated purpose of section 99A of the ITAA 1936 to prevent the use of trusts for tax avoidance, the Commissioner is of the opinion that it is unreasonable for section 99A of the ITAA 1936 to apply to the trust in respect of each of the income years throughout the ruling period.

Therefore, the Commissioner's discretion will be exercised for the income years included in the ruling period.

Issue 2

Question 2

Detailed reasoning

Section 152-80(3) of the ITAA 1997 states that the Commissioner may extend the time limit in paragraph 152-80(1)(d) of the ITAA 1997.

In order for the time limit to be extended section 152-80(1) of the ITAA 1997 must be satisfied:

This section applies 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.

Application to your situation

In this case, the asset forms part of an estate of a deceased individual and has devolved to the individual's legal personal representative. The deceased individual would have been entitled to disregard the capital gain immediately prior to their death as they satisfied the relevant conditions just prior to their death (as discussed at question 2).

The CGT event, however, did not occur within 2 years of the individual's death. The delay was due to a life tenancy which was granted under the will of the deceased. The life tenant continued to reside on the farming property until their death. We accept this was beyond the control of the executors of the deceased estate and prevented the sale until the life tenancy came to an end. Therefore, the Commissioner will exercise his discretion to extend the time limit to XX/XX/20XX.

Question 3

Detailed reasoning

In order to consider whether the estate can disregard the capital gain from the sale of the property under the 15-year exemption, we need to consider whether the deceased would have been entitled to the 15-year exemption just prior to their death.

Basic conditions

A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied:

•          A CGT event happens in relation to a CGT asset of yours in an income year,

•          The event would have resulted in a gain,

•          The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

•          At least one of the following applies;

-              you are a small business entity for the income year,

-              you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997,

-              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.

15-year exemption

If you are an individual, you can disregard a capital gain under section 152-105 of the ITAA 1997 if meet the following conditions:

•         the basic conditions are satisfied

•         you continuously owned the CGT asset for the 15-year period ending just before the CGT event and

•         you are 55 or over at the time of the CGT event and the event happens in connection with your retirement.

A legal personal representative or executor of a deceased estate is eligible for the 15 year exemption to the same extent that the deceased would have been just prior to their death, except that:

•         the CGT event does not need to be in connection with the retirement of the deceased

•         the deceased needs to have been 55 or older immediately before their death, rather than at the time of the CGT event.

Application to your situation

In this case, we accept that the deceased was able to satisfy the basic conditions just prior to their death. The deceased continuously owned the property for the 15-year period just prior to their death and was over 55 years of age when they passed away. As the deceased was entitled to apply the 15-year exemption just prior to their death the estate is able to disregard any capital gain made on the disposal of the property provided it is sold by XX/XX/20XX.