Edited version of private advice

Authorisation Number: 1052242769502

Date of advice: 29 May 2024

Ruling

Subject: Commissioner's discretion - deceased estates

Question 1

Will the Commissioner exercise his discretion to allow further time to reduce or disregard capital gains relating to the disposal of property A beyond the 2-year period to XX July 20XX as outlined in section 152-80(3) of the Income Tax Assessment Act 1997 (ITAA1997)?

Answer

No. Since you would not be eligible to the small business CGT concessions on this property, the Commissioner cannot grant an extension.

Question 2

Will the Commissioner exercise his discretion to allow further time to reduce or disregard capital gains relating to the disposal of the 50% interest in property B, which Individual B initially acquired, beyond the 2-year period to XX July 20XX as outlined in section 152-80(3) of the ITAA1997?

Answer

Yes. An extension will be granted in relation to Individual B's initial 50% interest in the property.

Question 3

Will the Commissioner exercise his discretion to allow further time to reduce or disregard capital gains relating to the disposal of the 50% interest in property B, inherited by Individual B, beyond the 2-year period to XX July 20XX as outlined in section 152-80(3) of the ITAA1997?

Answer

No. Since you would not be eligible to the small business CGT concessions on the 50% interest in this property the deceased inherited, the Commissioner cannot grant an extension.

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

16 December 2019

Relevant facts and circumstances

Property was used for primary production business which was operated via a partnership between Individual A and Individual B and was farmed since 19XX.

Property B was leased to a third party in 20XX until the date of sale.

Individual A, died on X month 20XX, the asset passing to Individual B.

Property A was owned 100% by Individual A until their death, it then passed to Individual B.

Property B was owned 50% by Individual A and 50% Individual B until Individual A's death, their 50% ownership interest passed to Individual B.

Individual B died on XX December 20XX.

Probate granted Individual C on XX July 20XX.

Motion filed with Supreme Court XX December 20XX contesting the will.

Court ordered Mediation was initiated on X July 20XX. A water agreement was drawn up to allow for water on all properties. Property B to be transferred to applicants.

Water agreement finalised on XX April 20XX with a caveat registered on the title on X June 20XX.

Covid 19 restrictions caused delays in the sale of the property as potential buyers were not able to visit the property.

Title transfers from the estate completed on XX June 20XX.

Applicants signed the contract of sale, selling land to a third party, signed XX July 20XX.

Settlement occurred XX August 20XX.

Individual B satisfied the maximum net value asset test immediately prior to their death.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-80

Detailed reasoning

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.

The properties eventually passed to the beneficiaries so the first dot point above is satisfied. The third dot point is at issue in this ruling and is discussed below so the second dot point needs to be considered next.

For the deceased to have been able to apply the small business concessions themselves immediately prior to their death, they would have needed to be able to satisfy the basic conditions Subdivision 152-A of the ITAA 1997. 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 CGT 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 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.

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) provides that a CGT asset is an active asset at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

(i) you, or

(ii) your affiliate, or

(iii) another entity that is connected with you, or

(b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you

However, an asset whose main use by you is to derive rent cannot be an active asset unless its main use for deriving rent was only temporary (subparagraph 152-40(4)(e)(ii) of the ITAA 1997).

Commissioners' discretion under subsection 152-80(3)

In determining whether to exercise the discretion to extend the time limit set out in paragraph 152-80(1)(d) of the ITAA 1997, the Commissioner considers the following factors:

•         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, 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.

Application to your circumstances

In order for the small business concessions to be applied, Individual B would need to have been able to apply the small business concessions in their own right, immediately prior to their death.

The sale of the properties (CGT assets) were CGT events which resulted in capital gains. Individual B satisfied the maximum net value asset test immediately prior to their death. Therefore, you will be entitled to small business concessions if the various interests in the properties meet the active asset test.

Property A

As the property was not used in the business by Individual B or an affiliate or connected entity of theirs during the period of their ownership, the property could not be considered an active asset. Individual B would not have been entitled to the small business CGT concessions in relation to this property, the Commissioner cannot grant an extension of time in relation to its disposal.

Property B - Individual's initial interest

Individual B would have been able to apply the small business concessions to their original 50% ownership interest immediately prior to their death as they had owned this interest for more than 15 years. The property was actively used as part of the business from 19XX until 20XX, after which it was rented to a third party. This interest in the property therefore meets the active asset test.

The sale of the property was delayed by court action, mediation and Covid 19 lockdowns, there is no bias to the Commissioner in allowing the extension, and there is no unsettling of people or unfairness to people in like positions or the wider public. In addition, there does not appear to be any mischief involved, and it is fair and equitable to allow an extension of time. Based on the facts, it is appropriate for the Commissioner to grant an extension of time to reduce or disregard capital gains relating to the disposal of Individual B's original 50% interest in the property to XX July 20XX.

Property B - Individual's inherited interest

As this interest in the property was not used in the business by Individual B or an affiliate or connected entity of theirs during the period of their ownership, this interest in the property could not be considered an active asset. Individual B would not have been entitled to the small business CGT concessions in relation to this interest in property, the Commissioner cannot grant an extension of time in relation to its disposal.