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Edited version of private advice
Authorisation Number: 1052227872279
Date of advice: 3 April 2024
Ruling
Subject: CGT- deceased estates
Question 1
Will the Commissioner exercise the discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997), in relation to interest B, to allow the estate further time to apply the 15-year exemption?
Answer
Yes.
Question 2
Will the Commissioner exercise the discretion under subsection 118-195(1) of the ITAA 1997 and extend the two-year period in relation to the main residence portion of interest A?
Answer
Yes.
This ruling applies for the following period:
1 July 20XX to 30 June 20XX
The scheme commenced on:
DDMMYY
Relevant facts and circumstances
The property was acquired by the deceased's parent and spouse in 195X as tenants in common with both holding a 50% interest.
The deceased's parent died in 196X and the deceased inherited their 50% share (Interest A).
The deceased's spouse died in 198X (post CGT) and their 50% share went to the Estate (Interest B).
The deceased passed away in October 20XX and the total property went to the Estate.
The land was used to carry on a business by the deceased's parent and spouse, the deceased's parent 19XX to 19XX, then by the deceased and the spouse from 19XX to 19XX. The business was then managed by The Estate up until the deceased's death in October 20XX.
The business was a primary production business that was in operation immediately prior to the deceased's death, ceasing only after their death.
The property satisfied the active asset test.
The deceased satisfied the maximum net value asset test.
A property valuation was undertaken in November 20XX.
The property was available for sale from March 202X and had the interest of multiple buyers.
The Covid19 pandemic lockdowns caused delays to the sale with many unwilling to commit to a purchase during uncertain economic times as well as the lockdowns themselves making property viewings difficult.
Negotiations with a potential buyers lasted several months but ultimately fell through.
Old titles and the property having tenants in common ownership caused delays in the sale process.
The sale contract was signed in February of 20XX with settlement occurring in March 20XX.
The size of the property is XX hectares including the residence and farmland.
The property was sold by the executor of the estate.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 118-195
Income Tax Assessment Act 1997 subdivision 152-A
Income Tax Assessment Act 1997 section 152-35
Income Tax Assessment Act 1997 section 152-80(3)
Reasons for decision
Section 152-80 of the ITAA 1997 allows either the legal personal representative of an estate or the beneficiary to apply the small business capital gains tax (CGT) 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 or passes to a beneficiary, and
• the deceased would have been able to apply the small business concessions themselves immediately prior to their death, and
• a CGT event happens within two years of the deceased's death unless the Commissioner extends the time period in accordance with subsection 152-80(3) of the ITAA 1997.
In this case, the property was transferred to the executor of the estate and the deceased would have been able to apply the small business 15-year exemption immediately prior to their death to interest B.
As the Covid19 pandemic lockdowns and breakdown in negotiations account for the delay in the sale of the property. There is no bias to the Commissioner in allowing the extension, there is no unsettling of people or unfairness to people in like positions or the wider public. There does not appear to be any mischief involved, and it is fair and equitable to allow an extension of time. Based on these facts, it is appropriate for the Commissioner to grant an extension of time.
As Interest B was acquired post September 1985, it is eligible for Small Business Concessions. Interest A having been acquired pre-September 1985, is not eligible for Small Business Concessions.
As per subsection 118-195(1) of the ITAA 1997, a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling (or your ownership interest in it) is disregarded if:
a) you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and
b) at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied.
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Beneficiary or trustee of deceased estate acquiring interest |
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Item |
One of these items is satisfied |
And also one of these items |
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1 |
the deceased acquired the ownership interest on or after 20 September 1985 and the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income |
your ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner |
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2 |
the deceased acquired the ownership interest before 20 September 1985 |
the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of: |
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(a) |
the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or |
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(b) |
an individual who had a right to occupy the dwelling under the deceased's will; or |
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(c) |
if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary - that individual |
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In this case, the deceased acquired interest A before 20 September 1985 and the dwelling on the property was the deceased's main residence just before their death. As a pre-CGT asset the deceased would not have been entitled to any Small Business CGT Concessions in relation to its disposal. According to section 128-15 of the ITAA 1997, the estate is considered to have acquired this interest on XX October 20XX at its market value on that day. A portion of this interest would be eligible to the main residence exemption under section 118-195 of the ITAA 1997. It is this portion of interest A that is being considered here. We accept the delay in the sale of the property was outside the control of the executors. Therefore, the Commissioner will grant an extension of time until X February 20XX the date the Estate's ownership interest ended, in relation to the main residence portion of interest A.
Further issues to consider
As the property was more than 2 hectares the estate will only get a partial exemption. The following example, from QC 66037, may assist with your calculations:
Example: Land used for private purposes
Mohammed bought a house with 15 hectares of land. He used 10 hectares for apple farming and 5 hectares for private purposes. Mohammed can get the main residence exemption for:
• the house
• 2 hectares of land he selects out of the 5 hectares that he uses for private purposes (the land he selects must include the land under the house).
After 9 years, Mohammed decided to sell. He had his house valued. The valuation stated that the house and the 2 hectares of land he had selected were worth two-thirds of the total value of the property.
Mohammed can claim the main residence exemption for two-thirds of the capital gain on the sale of the property.