ATO ID 2004/121: CGT small business concessions: retirement - choice made by beneficiary of deceased estate
Date of decision: 23 December 2003
Year of income: Year ended 30 June 2004
Business line: Private Groups and High Wealth Individuals

Issue
Can the beneficiary of a deceased estate choose the small business retirement exemption in Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997) on the sale of the deceased's business assets by the estate's executor, if the beneficiary is absolutely entitled to the business assets as against the trustee?

Decision
Yes. In the circumstances, the beneficiary is entitled to choose the small business retirement exemption in Subdivision 152-D.

Facts
The deceased operated a business and owned a number of assets which were used in the business. The executor/trustee appointed by the deceased has continued to operate the business since the death of the deceased. The deceased's spouse is the only beneficiary under the deceased's will. The executor has called in all of the deceased's assets and paid all of their debts. All that remains to be done is to distribute the assets (or the proceeds from their sale) to the sole beneficiary. As the beneficiary is not able to operate the business, the beneficiary has requested that it be sold by the trustee. The net value of the beneficiary's CGT assets, including the assets to which the beneficiary is entitled under the will, is less than $5 million. The beneficiary has asked whether they or the executor is entitled to choose the small business retirement exemption in respect of any capital gain made on the sale of the business assets.

Reasons for decision
Summary: A CGT asset passes to a beneficiary in the estate of a deceased person if the beneficiary becomes the owner of the asset under the will of the deceased person or in one of the other ways outlined in section 128-20 of the ITAA 1997. It is considered that a CGT asset passes to a beneficiary of a deceased estate under section 128-20 of the ITAA 1997 when the beneficiary becomes absolutely entitled to the asset as against the estate's trustee (whether or not the asset is later transmitted or transferred to the beneficiary). Because the administration of the estate in this case is complete, the executor is now acting in the capacity of trustee. The beneficiary is absolutely entitled to the assets of the business as against the trustee, because the beneficiary has a vested, indefeasible and absolute interest in each asset and is able to direct how each asset be dealt with. Therefore, the assets of the deceased's business have passed to the beneficiary which means that anything done by the trustee, including the carrying on of the business and its sale, is taken to have been done by the beneficiary (section 106-50 of the ITAA 1997). Because any capital gain made on the sale of the business will be taken to have been made by the beneficiary, the beneficiary is entitled to choose the small business retirement exemption in Subdivision 152-D of the ITAA 1997 in respect of the gain, provided the other conditions for the exemption are satisfied. The beneficiary satisfies the maximum net asset value test in section 152-15 of the ITAA 1997 (because the net value of their assets is less than $5 million) and the active asset test in section 152-35 of the ITAA 1997 (because the actions of the executor in continuing to operate the business are attributed to the beneficiary). Therefore the beneficiary is entitled to choose the small business retirement exemption to the extent that their CGT retirement exemption limit is not exceeded. Note: For CGT events happening in the 2007-08 and later income years, section 152-15 of the ITAA 1997 has been amended by the Tax Laws Amendment (Small Business) Act 2007 to increase the maximum net asset value test to $6 million.

Legislative references: Income Tax Assessment Act 1997 Subdivision 152-D section 106-50 section 128-20 section 152-15 section 152-35
Related public rulings and determinations: Taxation Determination TD 2004/3 | Draft Taxation Ruling TR 2004/D25
Subject references: capital gains tax CGT deceased estates CGT event A1-disposal of a CGT asset CGT retirement exemptions