Edited version of private advice

Authorisation Number: 1052277358111

Date of advice: 17 July 2024

Ruling

Subject: CGT - small business concessions

Question

Will the Commissioner exercise their discretion under paragraph 103-25(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension of time for you to choose to apply any available small business capital gains tax (CGT) concessions to a capital gain that arose in the 20XX financial year?

Answer

Yes.

Question

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

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 2023

The scheme commenced on:

21 May 2020

Relevant facts and circumstances

Your spouse (the deceased) purchased the property (the office) on XX month 20XX for $XXX,XXX.XX and the property was settled on XX November 20XX.

The deceased died on XX month 20XX, aged XX.

Funeral for the deceased was held XX month 20XX.

You held your first meeting with the solicitor regarding how to settle ongoing legal matters due to the death of your spouse on XX June 20XX.

You began attending the office weekly by XX June 20XX to start the process of winding up the business.

You met with your lawyer to sign the probate forms and discussed the sale of the deceased's office. Your lawyer agreed to assist with the contract of sale.

Probate was finalised on XX month 20XX

Property title was transferred to your name on XX month 20XX.

Covid 19 pandemic restrictions prevented you from attending the office to arrange the removal of furniture and equipment.

Covid 19 pandemic restrictions prevented viewings of the property by potential buyers.

Covid 19 pandemic restrictions were removed, however you were unable to attend the office due to illness. You did arrange two appraisals from Real Estate Agents during this time, however.

Contract of sale for the property was signed on XX month 20XX with settlement occurring on XX month 20XX, the property was sold for $XXX,XXX.

On XX month 20XX your accountant acknowledged an error was made on the relevant tax return and advised you to apply for a private ruling in relation to the sale of the property, this was further delayed as you engaged the services of a different accountant.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 103-25

Income Tax Assessment Act 1997 section 103-25(1)(b)

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

Reasons for decision

Question 1

Detailed reasoning

CGT event A1

Section 104-10(3) of the ITAA 1997 provides that:

The time of the event is:

(a) when you enter into the contract for the disposal; or

(b) if there is no contract - when the change of ownership occurs.

Taxation Determination TD 94/89 Income tax: capital gains: in what year of income is a taxpayer required for tax purposes to include a capital gain or loss in relation to land disposed of under a contract which is made in one year of income, but which is settled in a later year of income? (TD 94/89), provides that a taxpayer is not required to include any capital gain or loss in the appropriate year until an actual change of ownership occurs.

Choices

Subsection 103-25(1) of the ITAA 1997, states that a choice you make under Part 3-1 or Part 3-3 of the ITAA 1997 must be made:

(a) by the day you lodge your income tax return for the income year in which the relevant CGT event happened; or

(b) within a further time allowed by the Commissioner.

Subsection 103-25(2) of the ITAA 1997 states that the way you (and any other entity making the choice) prepare your income tax returns is sufficient evidence of the making of the choice.

ATO ID 2003/103 Capital gains tax: Choice and the small business roll-over (ATO ID 2003/103), considers when a choice is made in relation to the small business CGT concessions. It provides the general rule that a choice available under the CGT provisions, once made, cannot be changed. However, it also provides that a taxpayer who did not consider the CGT concessions has not made a choice can, if the Commissioner allows further time, later make a choice for a CGT concession and amend their return to reduce or disregard the capital gain.

Application to your circumstances

You lodged your 20XX income year tax return, but you included the CGT event. Your previous tax agent did not consider the small business CGT concession and they were not applied in the 20XX tax return. Due to the advice from the previous tax agent, it is understood that you have not considered the relevant CGT concessions and effectively have not made a choice. This is an acceptable explanation for the period of extension required. There would be no prejudice to the ATO by allowing the extension. There is no mischief involved. Having considered your circumstances and the relevant factors. The Commissioner considers it fair and equitable in these circumstances for an extension to be allowed. An extension of time until XX June 20XX is allowed for you to make the choice to apply the relevant CGT concessions.

As a result of this ruling, the previous tax return lodged will need to be amended, you are now able to amend the tax return for the 20XX financial year to include small business CGT concessions.

Question 2

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.

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 this case, the property was transferred to the beneficiary and the deceased would have met the basic conditions to the small business CGT concesssions immediately prior to their death, having operated the business from the office for a total of XX years and X months, thus satisfying the active asset test in excess of 7.5 years.

As there were several factors beyond your control which accounts for the delay in the sale of the property, these being the Covid 19 pandemic lockdowns negating your access to the property as well as making viewings from potential buyers impossible, illness, and an error in the lodgment of your tax return on the part of your previous tax agent. 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 to XX September 20XX.