Edited version of private advice

Authorisation Number: 1052298711581

Date of advice: 9 October 2024

Ruling

Subject: Capital gains tax

Question 1

Will the Commissioner exercise the discretion in subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the time limit to 30 June 2025 to allow The Trustee for Estate of the deceased (Trustee) to apply the small business 15-year exemption in Subdivision 152-B to disregard its XX% share of the capital gain it makes on the disposal of Property?

Summary

Yes. As the deceased's Will was challenged and the trustee could not sell the deceased share in the property during this time, the Commissioner will exercise their discretion under subsection 152-80(3) of the ITAA to extend the time limit.

The deceased interest in the property was owned for more than 15 years and they would have met the basic conditions immediately prior to their death. As the deceased was over 55 years old immediately before their death, it is not necessary for the CGT event to have happened in relation to their retirement. Therefore, the trustee can apply the small business 15-year concession to disregard the capital gain it makes on its XX% share of the disposal of the property.

Question 2

Will individual A be entitled to choose to apply the small business retirement exemption in Subdivision 152-D of the ITAA 1997 to the capital gain they makes from the sale of their XX% share in the Property?

Summary

Yes. Individual A satisfies the basic conditions in relation to their interest in the property and will be older than 55 when their interest is sold. Therefore, individual A is entitled to apply the small business retirement exemption to the gain from the sale of their interest in the property, to the extent of their lifetime limit of $500,000.

This ruling applies for the following periods:

Year ending 30 June 2025

The scheme commenced on:

1 July 2024

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Individual A and the deceased acquired the property in 20XX.

Individual A owned a XX% interest and the deceased owned XX% interest in the property.

A farming operation was conducted by the company.

The deceased was sole director and shareholder of the company.

The property was continuously farmed by the company from the date of acquisition until the financial year ending 30 June 20XX. The operation ceased due to the deceased's health deteriorating.

The deceased died on in the financial year ending 20XX and was over the age of 55.

The deceased interest in the property was transferred to the Legal Personal Representatives (trustee) on the date of their death.

Immediately after the deceased's death the Will was challenged by individual A. The trustee was unable to sell the property during the dispute.

An agreement was reached on X May 20XX between individual A and the deceased's children. The property is to be sold and individual A will stay living on the property until settlement money is received.

Issue of probate of the Will was received on X August 20XX.

In the agreement individual A is to receive XX.X% of the proceeds from the sale of the property and individual A will use this to buy a house.

Individual A is a beneficiary of the will.

The deceased and any connected entities and affiliates had less than $6m in net assets just before their death.

Individual A and any connected entities and affiliates will have less than $6m in net assets just before the CGT event.

Individual A will be over the age of 55 at the time of the CGT event.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-80

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 section 152-305

Reasons for decision

Question 1

Will the Commissioner exercise the discretion in subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the time limit to 30 June 2025 to allow The Trustee for Estate of the deceased (Trustee) to apply the small business 15-year exemption in Subdivision 152-B to disregard its XX% share of the capital gain it makes on the disposal of Property?

Detailed reasoning

Section 152-80 of the ITAA 1997 allows either the legal personal representative of an estate or beneficiary of the deceased estate to apply the small business capital gains tax (CGT) concessions in respect of the sale of the deceased's asset in certain circumstances.

Subsection 152-80(1) 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.

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

The deceased died in the financial year ending 30 June 20XX, and the estate intends on selling the deceased's interest in the property in the 2024/25 financial year.

Relevantly, CGT event A1 happens if you dispose of a CGT asset, and the time of the event is when you enter the contract for the disposal or if there is no contract when the change of ownership occurs.

As the disposal of the property did not occur within 2 years of the deceased's death you will only be able to reduce or disregard the capital gain made on its disposal if the Commissioner extends the 2-year time limit.

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 has considered 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.

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 interest in 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 in section 152-35 of the ITAA 1997

Maximum net asset value test

You satisfy the maximum net asset value test if, just before the CGT event, the sum of the following amounts does not exceed $6 million:

(a)           the net value of the CGT asset of yours

(b)           the net value of the CGT assets of any entities connected with you, and

(c)           the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (section 152-15 of the ITAA 1997).

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 7.5 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) of the ITAA 1997 details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

Connected entity

The term 'connected with' is defined in subsection 995-1(1) of the ITAA 1997 as 'an entity is connected withyou in the circumstances described in section 328-125.'

Subsection 328-125(1) of the ITAA 1997 states that an entity is connected with another entity if:

(a)          either entity controls the other entity in a way described in this section, or

(b)          both entities are controlled in a way described in this section by the same third entity.

A company is controlled by an individual owner where the individual or the individual together with their affiliates carry between them the right to exercise a control percentage that is at least 40% of the voting power in the company (paragraph 328-125(2)(b) of the ITAA 1997).

In this case the deceased owned 100% of the shares and was the sole director in the company throughout the ownership period, therefore we consider that the company was a connected entity of the deceased prior to their death under paragraph 328-125(2)(b) of the ITAA 1997.

15-year exemption

Section 152-105 outlines the conditions required for the 15-year exemption where the CGT asset is owned by an individual.

Section 152-105states If you are an individual, you can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

(a)          the basic conditions in Subdivision 152-A are satisfied for the gain;

(b)          you continuously owned the CGT asset for the 15-year period ending just before the CGT event;

(c)          if the CGT asset is a share in a company or an interest in a trust - the company or trust had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset;

(d)          either:

(i)            you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or

(ii)            you are permanently incapacitated at the time of the CGT event.

It is noted that, for the purposes of section 152-80 of the ITAA 1997, subparagraph 152-105(d)(i) is modified by paragraph 152-80(2)(a) so that paragraph 152-105(d) only requires the deceased individual to have been 55 or over, or permanently incapacitated, at the time of the CGT event referred to in paragraph 152-80(1)(c).

Application to your circumstances

The dispute over the Will led to significant delays that were beyond the trustee's control.

The trustee intends on selling the property in the 2024-25 financial year, which will be soon after the agreement was reached.

There is no evidence of mischief, and it is accepted that the exercise of the discretion to grant the extension of time will not prejudice the Commissioner, nor cause any unsettling of people or of established practices.

There is an acceptable explanation for the extension to the 2-year period. The Commissioner will, therefore, exercise their discretion under subsection 152-80(3) of the ITAA 1997 to extend the time limit within which the CGT event will happen for the property.

Since section 152-80 of the ITAA 1997, examines what happens if a CGT event had happened in relation to an individual's CGT asset immediately before his or her death, the condition in paragraph 152-10(1)(a) is satisfied.

The second condition in paragraph 152-10(1)(b) of the ITAA 1997 is satisfied, as a capital gain would have been made if a CGT event happened at that time.

In relation to the third condition in paragraph 152-10(1)(c) of the ITAA 1997, the deceased's total net value of the assets held, including connected and affiliated entities, was below $6 million. Hence, the maximum net asset value test in section 152-15 is satisfied, resulting in the third condition in subparagraph 152-10(1)(c)(ii) being satisfied.

The final condition in paragraph 152-10(1)(d) of the ITAA 1997 requires the CGT asset to satisfy the active asset test in section 152-35.

The deceased owned their interest in the property for more than 15 years and the property was used by the company, a connected entity of the deceased for a total of at least 7½ years, therefore the deceased interest in the property will satisfy the active asset test in paragraph 152-10(1)(d) of the ITAA 1997.

The deceased satisfied all the basic conditions in subsection 152-10(1) of the ITAA 1997 immediately before death.

The deceased owned their interest in the property continuously for over 15 years immediately before death. Therefore, the second condition in paragraph 152-105(b) of the ITAA 1997 is satisfied.

The third condition in paragraph 152-102(c) of the ITAA 1997 is not relevant to this case as the asset is neither shares nor an interest in a trust.

152-105(d)(i) of the ITAA 1997 requires the CGT event to happen in connection with their retirement. However, this condition is modified by paragraphs 152-80(2)(a) and 152-80(2A)(a) which allows the legal personal representative or beneficiary of the deceased to reduce or disregard a capital gain in the same way as the deceased would have been entitled to.

In other words, there is no requirement that a CGT event happened in connection with the deceased's retirement, only that the deceased individual be aged 55 or over at the time of death. The deceased was over the age of 55 at the time of their death therefore, the fourth and final condition in paragraph 152-105(d) of the ITAA 1997 is satisfied.

The deceased satisfied all requirements in section 152-105 of the ITAA 1997 immediately before death and would have been able to apply the small business 15-year exemption to disregard the capital gain if a CGT event had happened immediately before their death, therefore the trustee is eligible to apply the 15-year exemption to their share of the proceeds from the sale of the deceased's interest in the property.

Question 2

Will individual A be entitled to choose to apply the small business retirement exemption in Subdivision 152-D of the ITAA 1997 to the capital gain they make from the sale of their 25% share in the Property?

Detailed reasoning

As Individual A did not use a property in a business their own, we need to consider how individual A is connected or affiliated with the company.

Affiliates

Subsection 328-130(1) of the ITAA 1997 states that an individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company. However, an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share.

There is also a note to section 328-130 of the ITAA 1997 which relevantly flags that for small business relief purposes, a spouse or a child under 18 years may also be an affiliate under section 152-47.

Subsection 152-47(1) of the ITAA 1997 applies if:

(a)          one entity (the asset owner) owns a CGT asset; and

(b)          either:

(i)            the asset is used, or held ready for use, in the course of carrying on a business in an income year by another entity (the business entity), or

(ii)            the asset is inherently connected with a business that is carried on in an income year by another entity (the business entity), and

(c)          the business entity is not (apart from this section) an affiliate of, or connected with, the asset owner.

Subsection 152-47(2) of the ITAA 1997 states that for the purposes of determining whether the business entity is an affiliate of, or is connected with, the asset owner, take the following to be affiliates of an individual:

(a)          a spouse of the individual;

(b)          a child of the individual, being a child who is under 18 years.

In this case, if the taxpayer was not an affiliate of the deceased under subsection 328-130(1) of the ITAA 1997, the taxpayer is deemed an affiliate under section 152-47 of the ITAA 1997 because:

(a)          Individual A owns an interest in the CGT asset being their ownership interest in the property; and

(b)          The property was used in the course of carrying on a business by the deceased; and

(c)          Individual A, is not otherwise an affiliate of or connected to deceased; and

(d)          The deceased was individual A's spouse.

In this case, individual A is considered an affiliate of the deceased and the company under subsection 152-47 of the ITAA 1997 as individual A is the deceased spouse and the company was a connected entity of the deceased. As identified in question 2, the deceased's interest in the property satisfies the active asset test. Therefore, individual A's interest in the CGT asset will also satisfy the active asset test.

Small business CGT retirement exemption

Under Subdivision 152-D of the ITAA 1997, if you are an individual, you can choose to disregard all or part of a capital gain if:

(a)          you satisfy the basic conditions

(b)          you keep a written record of the amount you chose to disregard (the CGT exempt amount), and

(c)          if you are under the age of 55 years old just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account.

If an individual is 55 years old or older when they make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or retirement savings account (RSA).

There is a lifetime limit of $500,000 for all choices that can be made in respect to the individuals under Subdivision 152-D of the ITAA 1997.

Application to your circumstances

In this case, the property satisfies the active asset test. Individual A has net assets of less than $6m just before the CGT event therefore satisfies the maximum net asset value test. As Individual A meets the basic conditions, they will be eligible to apply the retirement exemption in Subdivision 152-D of the ITAA 1997. As individual A is over 55 years old there is no requirement to pay any of the exempt amount (up to $500,000) into a complying superannuation fund or RSA.