Edited version of private advice

Authorisation Number: 1052372750773

Date of advice: 13 March 2025

Ruling

Subject: CGT - deceased estate

Question 1

Will the Commissioner (pursuant to subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997)) grant an extension of time until DD MM YYYY to dispose of the property and apply the small business CGT concessions?

Answer

Yes.

Question 2

Can the beneficiaries apply the CGT small business concessions to disregard the capital gain made on the disposal of the property under section 152-105 ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The Deceased acquired the Property in May 20XX.

The Deceased carried on primary production business as a sole trader.

The Deceased owned the Property for 15 years and used the Property for the Business for more than half of that period.

The Deceased passed in July 20XX.

The Deceased left their estate to their three children the Beneficiaries.

At the time of their passing, the net value of assets owned by the Deceased, any entities connected with the Deceased, and any affiliates of the Deceased or entities connected with such affiliates, was less than $6 million.

Before the Deceased death the partner of the Deceased made an application to the family court to dispute the Property ownership. This placed a caveat on the Property to prevent its sale. Conciliation was ordered between the Beneficiaries and the Deceased partner but was unsuccessful.

The matter went to the family court. The Judge ordered in favour of the Deceased partner.

The Beneficiaries lodged an appeal to the family court decision. The Beneficiary's appeal was successful, and the family court decision was overturned. The Property was to be transferred to the Beneficiaries.

The Deceased's partner appealed the decision. The appeal was unsuccessful.

The caveat was removed after the finalisation of the appeal, and the Property was transferred to the Beneficiaries in December 20XX.

The Beneficiaries prepared the Property for sale and placed it on the market in May 20XX.

The first two sales fell through as the buyer could not satisfy the finance clause on the contract of sale.

A contract of sale was signed in November 20XX.

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(3)

Income Tax Assessment Act 1997 section 152-105

Reasons for decision

Question 1 Decision:

Section 152-80 of the ITAA 1997 explains that the beneficiaries of a trust established by the will of a deceased individual can apply the small business CGT concessions in the same way the deceased would have been entitled to immediately before their death in respect of the sale of the deceased's CGT assets.

For the beneficiaries to apply the small business CGT concessions in the same way as the deceased would have been entitled to the asset must:

•                     Form part of the deceased estate; and

•                     The CGT asset must happen to that asset within 2 years of the individuals death.

The Commissioner can exercise discretion and extend the 2-year time limit (subsection 152-80(3)).

In determining whether to allow a longer period, the Commission will consider a range of factors such as:

•                     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, other than the Commissioner, or of established practices.

•                     The need to ensure 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

The Property could not be sold within 2-years of the Deceased death as a caveat was placed on the Property preventing it from being sold.

The Deceased family were involved in a back-and-forth dispute with the Deceased partner in relation to the distribution of the Property under the will. The dispute went through several courts over a 5-year period delaying the sale of the Property until 20XX when the dispute was resolved.

The Property was placed on the market as soon as practicable and was sold within 6-months.

The Commissioner considers that you have an acceptable explanation for the period of extension and that it would be fair and equitable to grant an extension.

There is no prejudice to the Commissioner if the additional time is allowed and an extension would not cause any unsettling of people.

The extension of time is fair to the wider public interest, there is no mischief involved and no adverse consequences are likely to occur if the extension of time is granted.

The Commissioner will exercise discretion to extend the 2-year time limit to XX November 20XX.

Question 2 Decision:

Section 152-80 of the ITAA 1997 explains that the beneficiaries of a trust established by the will of a deceased individual can apply the small business CGT concessions in the same way the deceased would have been entitled to immediately before their death in respect of the sale of the deceased's CGT assets (See answer to question 1).

15-year exemption for individuals

An individual can disregard any capital gain arising from a CGT event if the basic conditions in Subdivision 152-A are satisfied for the gain and the individual continuously owned the CGT asset for the 15-year period ending just before the CGT event (section 152-105 of the ITAA 1997).

The individual must be either 55 or over at the time of the CGT event and the event must happen in connection with their retirement or at the time of the CGT event they are permanently incapacitated (paragraph 152-105(d) of the ITAA 1997).

However, when applying the small business CGT concessions in the same way as the deceased would have been entitled to the deceased is only required to have been 55 or over, or permanently incapacitated immediately before their death (subsection 152-80(2) of the ITAA 1997).

Basic Conditions

The basic conditions in subdivision 152-A of the ITAA 1997 must be satisfied for an entity to be able to reduce its capital gains using the small business concessions.

To meet the basic conditions for relief the following must be 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.

•                     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.

-                    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.

-                    You do not carry on a business, but your CGT asset is passively held and is used in a business carried on by a small business entity that is your affiliate, or an entity connected with you.

•                     The CGT asset satisfies the active asset test.

Active Asset

The CGT asset must satisfy the active asset in order to satisfy the basic conditions. The active asset test will be met if (section 152-35 of the ITAA 1997):

•                     you have owned the CGT 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 from wen you acquired it to the time of the CGT event or the cessation of the business; or

•                     you have owned the CGT 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 period specified in section 152-35(2).

A CGT asset is an active asset at a time if, at that time the asset is used, or held ready for use, in the course of carrying on a business that is carried on whether by your or your affiliate or another entity that is connected with you (subsection 152-40(1) of the ITAA 1997).

Application to your circumstances

The Deceased used the farmland for XX years in their primary production business. As the Property has been used in the business for more than 7.5 years, the Property is considered to be an active asset.

The CGT event occurred within the extended period granted by the Commissioner, on XX November 20XX. (see answer to question 1)

The Deceased at the time of their passing had a net asset value below $6 million. This includes the net value of assets owned by the deceased, any entities connected with the deceased and any of the deceased affiliates and entities connected with their affiliates.

The Deceased would have been entitled to the 15-year exemption if the CGT event had occurred immediately before their death as the basic conditions were satisfied, and the Deceased owned the Property continuously for more than 15-years.

The Deceased satisfied the requirement that they are 55 or older immediately before their death.

The Beneficiaries of the estate are entitled to disregard the capital gain made on the disposal of the property.