Edited version of private advice

Authorisation Number: 1052287062888

Date of advice: 6 August 2024

Ruling

Subject: Deceased estate - small business concessions

Question 1

Are the parcels of land on the property you inherited from your late sibling subject to capital gains tax under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are you entitled to disregard the capital gain from the sale of X parcels of land on the property under subsection 118-195(1) of the ITAA 1997?

Answer

No.

Question 3

Can you apply the small business 15-year exemption to the sale of X parcels of land on the property under section 152-105 of the ITAA 1997?

Answer

No.

Question 4

Will the Commissioner exercise the discretion under subsection 152-80(3) of the ITAA 1997 to extend the time limit under subsection 152-80(1)(d) of the ITAA 1997 in relation to the sale of the property?

Answer

Not applicable.

This ruling applies for the following periods:

Year ending 30 June 2024

Year ending 30 June 2025

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

You are the trustee of your late sibling's estate and a beneficiary under the Will.

You inherited the property when your late sibling passed away.

The property consists of several parcels of land.

You plan to keep X parcels and sell the remaining parcels. There is a residence on one of the parcels.

Your late sibling acquired all of the parcels of land on the property prior to 20 September 1985.

Your late sibling carried on a farming business on the property.

Probate was granted in 20XX.

There were delays in selling the property that were outside your control.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 subsection 118-195(1)

Income Tax Assessment Act 1997 subsection 152-10(1)

Income Tax Assessment Act 1997 paragraph 152-10(1)(b)

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

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

Income Tax Assessment Act 1997 section 152-105

Reasons for decision

Question 1

Subsection 104-10(1) of the ITAA 1997 provides that CGT event A1 happens if you dispose of a CGT asset. Property is a CGT asset.

Subsection 104-10(3) of the ITAA 1997 provides the time of the event is:

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

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

Application to your circumstances

You inherited the property from your late sibling under his Will. The property consists of X parcels of land.

You intend to sell some of the parcels of land on the property. CGT event A1 will occur when you enter into a contract of sale or if there is no contract, when the change of ownership occurs.

Question 2

If a dwelling which is an asset of a deceased estate was acquired by the deceased before 20 September 1985, the first element of the cost base and reduced cost base of the dwelling to the trustee of the estate or a beneficiary to whom it passes is the market value of the dwelling on the day of death.

Subsection 118-195(1) of the ITAA 1997 provides there is a full CGT exemption for the trustee or a beneficiary to whom such a dwelling passes for any capital gain or loss that is made from a relevant CGT event happening if:

•         the trustee's or beneficiary's ownership interest ends within two years of the deceased's death (or within a longer period allowed by the Commissioner), i.e. typically if the dwelling is disposed of to a third party within that period, or

•         from the time of the deceased's death until the trustee's or beneficiary's ownership interest ends, the dwelling was the main residence of one or more of the following:

o   the spouse of the deceased immediately before death (except a spouse living permanently and separately apart from the deceased)

o   an individual who had a right to occupy the dwelling under the deceased's Will, or

o   if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary - that individual

Application to your circumstances

You intend on selling X parcels of the property. There is no dwelling on those parcels of land.

Any capital gain you make on the sale of X parcels cannot be disregarded under subsection 118-195(1) as there is no dwelling on those parcels of land.

Question 3

Deceased estate and small business CGT concessions

Under section 152-80 of the ITAA 1997, the legal personal representative or beneficiary of the deceased estate will be eligible for the small business CGT concessions where:

•         the asset is disposed of within two years of the date of death, and

•         the asset would have qualified for the small business CGT concessions if the deceased had disposed of the asset immediately before their death.

Basic conditions

Subdivision 152-A of the ITAA 1997 contains the basic conditions that must be satisfied for small business CGT relief. 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 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.

15-year exemption

Under section 152-105 of the ITAA 1997, an individual can disregard a capital gain from a CGT event happening to a CGT asset if:

•         the basic conditions are satisfied

•         the asset has been continuously owned for the 15-year period ending just before the CGT event happened

•         when the CGT event happened you were permanently incapacitated or at least 55 years old and the event happened in connection with your retirement.

Note the 15-year exemption can also be chosen if the deceased had met the requirements, except that it is not necessary for the CGT event to have happened in relation to the retirement of the individual.

Application to your circumstances

In this case, your late sibling would not have qualified for the small business CGT concessions as they would not have made a capital gain if they had disposed of the property immediately before the date of their death.

You therefore do not meet one of the basic conditions of the small business CGT concessions and are not eligible for the small business 15-year exemption.

As you do not qualify for the small business CGT concessions, the Commissioner has not considered exercising his discretion to extend the 2 year time limit in relation to the sale of the property.