Edited version of private advice

Authorisation Number: 1052313137541

Date of advice: 8 October 2024

Ruling

Subject: CGT - small business concessions

Question

Is the Estate of the deceased eligible for the small business 15-year exemption under section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997), allowing it to disregard the capital gain arising from the sale of the properties?

Answer

Yes.

This ruling applies for the following period:

Year Ended 30 June 2024.

The scheme commence on:

1 July 2023

Relevant facts and circumstances

The deceased passed away and their will directed all farmlands be held for their partner (person A) for and during their life.

Person A is one of the two joint executors of the Estate of the deceased (the trust).

Person A has carried on a sole trader primary production business, primary breeding and grazing sheep and growing wool for more than XX years on these properties.

Person A has an aggregated turnover of less than $X million in every year they have been trading.

Under the will person A is entitled to 100% of the income of the estate.

The trust distributed income from the trust to person A in the 2024 financial year.

The trust distributed no income or capital for 2023 and prior.

The will directed person A to have use of all farmlands for and during their lifetime.

Due to Person A's declining health the decision was made in the 2024 financial year to sell the properties.

Person A was over 55 years old at the time of sale the properties.

As a result of the sale of the properties person A has retired. All remaining farmland is being leased out to a third party.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

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 152-110

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-65

Income Tax Assessment Act 1997 section 152-70

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-125

Reasons for decision

Question

Is the Estate of the deceased eligible for the small business 15-year exemption under section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997), allowing it to disregard the capital gain arising from the sale of the properties?

Detailed reasoning

Basic Conditions

A capital gain that you make may be reduced or disregarded under Division 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) if the following basic conditions are satisfied:

• a CGT event happens in relation to a CGT asset of yours in an income year
• the event would have resulted in a gain
• the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and
• at least one of the following applies;

­   You are a CGT small business entity for the income year

­   you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997

­   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

­   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.

Active asset test

The active asset test outlined in section 152-35 of the ITAA 1997. The active asset test is satisfied 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 period specified in subsection (2); 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 ½ years during the period specified in subsection (2).

The test period beings when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business.

Section 152-40 of the ITAA 1997 explains that a CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

Section 328-110 defines the meaning of a small business entity to be:

You are a small business entity for an income year (the current year) if:

(a) you carry on a business in the current year; and

(b) one or both of the following applies:

(i) you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $2 million;

(ii) your aggregated turnover for the current year is likely to be less than $2 million.

Section 328-125 of the ITAA 1997 defined the meaning of connected with an entity to be:

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.

Direct control of an entity other than a discretionary trust

An entity (the first entity) controls another entity if the first entity, its *affiliates, or the first entity together with its affiliates:

(a) except if the other entity is a discretionary trust - own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of:

(i) any distribution of income by the other entity; or

(ii) if the other entity is a partnership - the net income of the partnership; or

(iii) any distribution of capital by the other entity; or

(b) if the other entity is a company - own, or have the right to acquire the ownership of, *equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage) that is at least 40% of the voting power in the company.

In this case, Person A is one of two executors of the trust, as well as being the sole beneficiary so they received 100% of the distributions from the trust.

Application to your circumstances

The sale of the properties happened in the 2024 income year which resulted in a gain. The trust has owned the properties for over 15 years. Person A who is connected to the trust carried on a primary production business for the entire ownership period and has a turnover of less than $X million in the CGT event year. Therefore, the trust satisfies the basic conditions in Division 152-A.

15-year exemption

Section 152-110 of the ITAA 1997 says that for the trust to be eligible for the small business 15-year exemption it must satisfy the basic conditions and three further conditions:

• the trust continuously owned the CGT asset for the 15-year period ending just before the CGT event;
• the 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 the trust owned the CGT asset;
• either:

­   the significant individual is 55 or over at the time of the CGT event and the event happens in connection with their retirement; or

­   the significant individual is permanently incapacitated at the time of the CGT event.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. A CGT event may be in connection with your retirement even if it occurs at some time before retirement.

Significant Individual

Section 152-55 of the ITAA 1997 defines a significant individual in a company or a trust at a time if, at that time, the individual has a small business participation percentage in the company or trust of at least 20%.

Section 152-65 of the ITAA 1997 says an entity's small business participation percentage in another entity at a time is the percentage that is the sum of:

(a) the entity's direct small business participation percentage in the other entity at that time; and

(b) the entity's indirect small business participation percentage in the other entity at that time.

The table in subsection 152-70(1) of the ITAA 1997 helps to work out an entity's direct small business participation percentage.

A trust (where entities have entitlements to all the income and capital of the trust)

(a) if the trustee makes distributions of income during the income year (the relevant year) in which that time occurs - the percentage of the distributions to which the entity was beneficially entitled; or

(b) if the trustee makes distributions of capital during the relevant year - the percentage of the distributions to which the entity was beneficially entitled;

or, if 2 different percentages are applicable, the smaller.

Application to your circumstance

In the 2024 income year the distribution went 100% to Person A so they are considered to have a 100% small business participation percentage in the trust in the 2009 to 2023 income years as well.

This means that person A is considered to have a 100% small business percentage in 2009 to 2024 resulting in them being a significant individual for the trust for 15 years.

In conclusion the properties were continuously owned by the trust for over 15-years. The trust satisfies the basic conditions under Division 152-A of the ITAA 1997. The trust is considered to have a significant individual for 15 years and they were over 55 years old when the property sold. Person A has fully retired as a result of the sale. Therefore, the trust is entitled to the small business 15-year exemption.