Edited version of private advice

Authorisation Number: 1052334511161

Date of advice: 22 November 2024

Ruling

Subject: Commissioner's discretion - deceased estates

Question

Will the Commissioner exercise his discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the time limit to the contract date, to allow the small business 15-year exemption to be applied to the property sale?

Answer

Yes, the Commissioner will extend the time limit up to and including the contract date of the property. The property passed to you as the Late Person A's beneficiary, and they would have been entitled to apply the small business capital gains tax concessions to reduce or disregard the capital gain made from the sale of the property. Further, as the property was used as an active asset in the Late Person A's business and used in the business for over 15 years, you are entitled to apply the small business 15-year exemption.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You acquired property as beneficiary of the estate of Person A (A). You subsequently disposed of this property.

In 19XX, A acquired a share in a business (the business), operating at a property (the property). The business was carried on in partnership by X partners, one of whom was A.

In 19XX, the owners of the property agreed to sell it to the partners. Each partner acquired a share of ownership in the property, represented by X titles, with A holding X titles.

In 19XX, the other partners agreed to sell their shares to A and Person B (B). A acquired an additional X interest in the property, totalling X interest. B acquired the remaining interest in the property. A and B established the A & B Partnership (the Partnership).

From 19XX, the business paid rent to the Partnership, which distributed it between A and B.

In 20XX, A passed away. On 30 June 20XX, the business was wound up. In accordance with A's will, their interest in the property passed from their estate to you, as their beneficiary.

From 20XX, initial discussions commenced with commercial real estate agents. In 20XX, engagement commenced with solicitors to effect A's will. You and B deliberated on whether to sell or lease the property.

There were delays in transferring the interest in the property into your name. The legal work required to be undertaken by solicitors took an enormous amount of time due to the solicitor's poor professional conduct. This was further compounded by the disruption caused by the COVID-19 pandemic.

In March 2020, Victoria's first COVID-19 lockdown commenced. The last lockdown concluded in October 2021. During this time, any transaction or activity concerning the property could not be conducted in an orderly and safe manner.

In 20XX, you acquired the interest in the property.

Due to the disruption and market uncertainty caused by COVID-19, the option to sell the property was deferred until market conditions stabilised. In mid-20XX, you and B decided to sell the property.

In 20XX, commercial real estate agents were formally appointed. In 20XX, the property was contracted for sale to an unrelated entity for $X. In 20XX, the property settled.

A owned and operated the business from the property for over 15 years, up to the date of their passing. Business turnover did not exceed $2,000,000 during this period. A did not own or operate any other business during this time, it was their sole business.

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 152-80

Income Tax Assessment Act 1997 section 152-105

Reasons for decision

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.

Section 152-80(1) of the ITAA 1997 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(2A) of the ITAA 1997 provides that the following persons (as the case requires) are entitled to reduce or disregard a capital gain under this Division in accordance with subsection (2):

(a) the legal personal representative of the individual;

(b) the beneficiary of the individual;

(c) the surviving joint tenant or tenants;

(d) the trustee or a beneficiary of the trust.

Subsection 152-80(2) of the ITAA 1997 provides that the person mentioned in subsection (2A) is entitled to reduce or disregard a capital gain under this Division in the same way as the deceased individual would have been entitled to as if:

(a) paragraph 152-105(d) only required the deceased individual to have been 55 or over, or permanently incapacitated, at the time of the CGT event referred to in paragraph (1)(c) of this section; and

(b) paragraph 152-305(1)(b) did not apply.

15-year exemption - section 152-105 of the ITAA 1997

Section 152-105 of the ITAA 1997 provides that 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.

Basic conditions in Subdivision 152-A of the ITAA 1997

Subsection 152-10(1) of the ITAA 1997 provides that a capital gain you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:

(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 the 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 (see section 152-15);

(iii) you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership;

(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;

(d) the CGT asset satisfies the active asset test (see section 152-35).

Subsection 152-10(1AA) of the ITAA 1997 provides that you are a CGT small business entity for an income year if:

(a) you are a small business entity for the income year; and

(b) you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million.

Active asset test

Subsection 152-40(1) of the ITAA 1997 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.

Subsection 152-35(1) of the ITAA 1997 provides that 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 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).

Subsection 152-35(2) of the ITAA 1997 provides that the period:

(a) begins when you acquired the asset; and

(b) ends at the earlier of:

(i) the CGT event; and

(ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

Application to your circumstances

Paragraph 152-80(1)(d) of the ITAA 1997 requires that the CGT event happens in relation to the CGT asset within 2 years of the individual's death.

As more than 2 years had passed between Person A's passing and the subsequent disposal of the property, paragraph 152-80(1)(d) of the ITAA 1997 is not satisfied, therefore the conditions within section 152-80 of the ITAA 1997 are not met, unless the Commissioner extends the time period in accordance with subsection 152-80(3) of the ITAA 1997.

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

In determining whether to exercise the discretion to extend the time limit set out in paragraph 152-80(1)(d), 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.

You contend that there were delays in transferring your interest in the property into your name. The legal work required to be undertaken by solicitors took an enormous amount of time due to the solicitor's poor professional conduct. This was further compounded by the disruption caused by the COVID-19 pandemic, during which time any transaction or activity concerning the property could not be conducted in an orderly and safe manner. Due to the disruption and market uncertainty caused by COVID-19, the option to sell the property was deferred until market conditions stabilised.

There is evidence of the acceptable explanation for the period of extension requested. It is considered fair and equitable in the circumstances to provide such an extension. 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.

The Commissioner will therefore exercise the discretion under subsection 152-80(3) of the ITAA 1997 to extend the time limit up to and including the contract date of the property.

Accordingly, by exercising the Commissioner's discretion in subsection 152-80(3) to extend the time limit, this results in section 152-80 of the ITAA 1997 now being satisfied for you to apply the small business capital gains tax concessions.

In applying the small business capital gains tax concessions, various conditions would need to be met.

You acquired the property as Person A's beneficiary. The property was used by the late Person A to run a small business. Person A was aged over 55 at the time of his death and would have been entitled to reduce or disregard the capital gain by applying the small business capital gains tax concessions if the CGT event had happened immediately before their death.

In your case, subsection 152-105(c) of the ITAA 1997 doesn't apply, and subsection 152-105(d) of the ITAA 1997 is modified by paragraph 152-80(2)(a) of ITAA 1997 as noted above, such that there is no requirement that the CGT event happened in connection with Person A retiring from working. The modified paragraph 152-105(d) of the ITAA 1997 only requires the deceased individual to have been 55 or over at the time of the CGT event.

Person A was a partner in a partnership that was a small business entity. The CGT asset was an interest in a partnership asset, being the 3/5 interest in the property. Person A continuously owned the asset for more than 15 years immediately before their death. The business operated from the property for more than 15 years and its turnover did not exceed $2 million.

The basic conditions in subsection 152-10(1) of the ITAA 1997 are satisfied. The active asset test is satisfied.

Person A satisfied the requirements (as modified) in section 152-105 of the ITAA 1997 immediately before their death and would have been able to apply the small business 15-year exemption to disregard the capital gain from the disposal of the property if that occurred immediately before their death.

Summary

In this case, the property was transferred to you as the beneficiary of the deceased estate and the deceased would have been able to apply the small business 15-year exemption immediately prior to their death.

It is accepted in this case that there were delays outside the control of the estate and beneficiary in finalising settlement and sale of the deceased property, 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 XX in 20XX.

Therefore, you are entitled to the 15-year exemption to disregard your capital gain from the disposal of your interest in the property.