Private ruling: Capital gains tax - Small business relief - Maximum net asset value test
Date of advice: 28 October 2016
Published: December 2016
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Does the Estate satisfy the maximum net asset value (MNAV) test under section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Will the Estate be able to apply the capital gains tax (CGT) small business 50% reduction under Subdivision 152-C of the ITAA 1997 if the executors of the Estate sell the share in the Company within two years of the death of the deceased? | A2: Yes. | Q3: Is the Estate able to use the retirement exemption under subdivision 152-D of the ITAA 1997 if the executors of the Estate sell the share in the Company within two years of the death of the deceased? | A3: Yes.

Relevant facts and circumstances: The deceased passed away on XX/XX/XXXX aged over 55. Prior to the deceased's death, the deceased held the sole share and 100% of the voting rights in the Company. The deceased was not connected or affiliated with any other entities except the Company. The deceased acquired the sole share in the Company on XX/XX/XXXX. The Executors of the Estate are considering selling the share in the Company. The Executors have operated the Company from the date of death of the deceased to the present day. A valuation was prepared by a qualified valuer which states the net value of the CGT Assets of the Company at the date of death was $X,XXX,XXX. The total net value of the CGT assets of the deceased, excluding the share in the Company, for the purposes of the maximum net asset value test is $XX,XXX. Recently the Estate received offers for the sale of the share in the company ranging from $X,XXX,XXX to $X,XXX,XXX. The Executors will be accepting the highest binding offer of $X,XXX,XXX. Since the date of death the net assets of the Company have increased by $X,XXX,XXX under new management and dividends of $XXX,XXX have been paid. For a total of more than half the time from the date of acquisition of the share by the deceased until his death, the market value of the active assets of the Company were 80% or more of the market value of the total assets of the Company.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-10(1A) | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-20 | Income Tax Assessment Act 1997 subsection 152-20(1) | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Paragraph 152-35(1)(a) | Income Tax Assessment Act 1997 Paragraph 152-35(1)(b) | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Subsection 152-40(3) | Income Tax Assessment Act 1997 Section 152-80 | Income Tax Assessment Act 1997 Section 152-305 | Income Tax Assessment Act 1997 Section 152-315 | Income Tax Assessment Act 1997 Paragraph 152-315(1)(b) | Income Tax Assessment Act 1997 Section 152-320 | Income Tax Assessment Act 1997 Section 152-325

Reasons for decision: Summary: If the share in the Company is sold by the Executors within two years of the deceased's death, the Executors can access the small business concessions to reduce the assessable capital gain as the maximum net asset value test was met immediately before the deceased passed away and the share is considered to be an active asset. Accordingly, the Estate is eligible to access the 50% active asset reduction and the retirement exemption on the capital gain made in relation to the disposal of the share if the disposal takes place with two years of the date of death. | Detailed Reasoning - CGT event happens within 2 years of individual's death: Where an asset forms part of the estate of a deceased individual, section 152-80 of the ITAA 1997 provides that where the deceased individual would have been entitled to access the small business CGT concessions immediately before his or her death, then the trustee of the deceased estate will be eligible to access these concessions if a CGT event happens in relation to the CGT asset within 2 years of the individual's death. The Commissioner can extend the two–year period. Under Division 152 of the ITAA 1997 four different types of concessions may be accessed if the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied. These are: (a) the 15 year exemption (Subdivision 152-B of the ITAA 1997) (b) the 50% reduction (Subdivision 152-C of the ITAA 1997) (c) the retirement concession (Subdivision 152-D of the ITAA 1997) (d) the roll over (Subdivision 152-E of the ITAA 1997) The Executors of the Estate will be eligible for the retirement exemption to the same extent that the deceased would have been just prior to their death, except that there is no requirement for the deceased to contribute an amount to a complying superannuation fund or a retirement savings account. | Detailed Reasoning - Small Business Concessions: Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset in an income year. (b) the event would 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 in section 152-15 of the ITAA 1997 (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or (iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. If the CGT asset is a share in a company or an interest in a trust, one of these additional basic conditions must be satisfied: • You must be a concession stakeholder in the company or trust, or • CGT concession stakeholders in the company or trust together have a small business participation percentage in the entity claiming the concession of at least 90%. | Detailed Reasoning - Application to the Estate's circumstances: Basic condition (a): If the Estate disposes of the share, CGT event A1 relating to the disposal of a CGT asset will happen and this condition will be satisfied. Basic condition (b): If the Estate disposes of the share and as a result the disposal of the share gives rise to a capital gain, this condition will be satisfied. Basic condition (c): The maximum net asset value test in section 152-15 of the ITAA 1997 requires that the total net value of CGT assets owned by the deceased, entities connected with the deceased, and any affiliates of the deceased or entities connected with these affiliates did not exceed $6 million just before the CGT event that results in the capital gain for which the concessions are sought. Section 152-20 of the ITAA 1997 explains the meaning of 'net value of the CGT assets'. Subsection 152-20(1) of the ITAA 1997 states the net value of the CGT assets of an entity is the amount (whether positive, negative or nil) obtained by subtracting from the sum of the market values of those assets the sum of: (a) The liabilities of the entity that are related to the assets; and (b) The following provisions made by the entity: (I) Provisions for annual leave; (II) Provisions for long service leave; (III) Provisions for unearned income; and (IV) Provisions for tax liabilities. Shares held in a connected entity or affiliate are excluded when calculating net value as the net value of the CGT assets of the connected entity or affiliate is already included in the maximum net asset value test (paragraph 152-20(2)(a) of the ITAA 1997). In this case, from the information provided the Commissioner accepts that the maximum net asset value test was met by the deceased immediately before their death. Basic condition (d): The active asset test in section 152-35 of the ITAA 1997 requires the CGT asset that gave rise to the capital gain to be an active asset for a particular period. Where the asset is held for less than 15 years the requirement is that it be an active asset for at least half the period of ownership. Section 152-40 of the ITAA 1997 provides the meaning of active asset. Under subsection 152-40(3) of the ITAA 1997, shares in a company will be an active asset at a given time if the company is an Australian resident, and the company passes the 80% test. The 80% test requires that the total of the market value of the active assets of the company is 80% or more of the market value of all of the assets of the company. In this case, the CGT asset to be disposed of is the share in the Company. We have been advised that for a total of more than half the time from the date of acquisition of the share by the deceased until their death, the market value of the active assets of the Company were 80% or more of the market value of the total assets of the Company. Therefore, the share was an active asset for more than half the period of ownership by the deceased. Consequently, the share held in the Company satisfies the active asset test under section 152-35 of the ITAA 1997. Additional basic condition The deceased was a concession stakeholder in the Company just before they passed away as they were a significant individual by having a small business participation percentage of at least 20%. Consequently, this additional basic condition that applies where the CGT asset is a share in a company, has been met. Small Business 50% Reduction As the basic conditions have been met, the Small Business 50% Reduction is available to be used by the Estate with respect to the disposal of the share (section 152-205 of the ITAA 1997). Small business retirement exemption As noted above, for the purposes of the retirement concession under Subdivision 152-D of the ITAA 1997, the trustee of a deceased estate is eligible for the retirement exemption to the same extent that the deceased would have been just prior to their death, except that there is no requirement for the deceased to contribute an amount to a complying superannuation fund or a retirement savings account. Accordingly, the Estate will be able to apply the retirement concession and exclude any capital gain remaining after subtracting the Small Business 50% Reduction provided it meets the conditions outlined in sections 152-305, 152-315 and 152-320 of the ITAA 1997. Section 152-305 of the ITAA 1997 requires that the basic conditions are satisfied for the gain. Section 152-315 of the ITAA 1997 addresses choosing the amount of the capital gain to be disregarded. It requires that the taxpayer's CGT retirement exemption limit is not exceeded and that the chosen CGT exempt amount must be specified in writing. Section 152-320 of the ITAA 1997 provides the meaning of the CGT retirement exemption limit. It provides that the taxpayer's 'limit at a time is $500,000 reduced by the CGT exempt amounts of CGT assets specified in choices previously made by or for the taxpayer under this Subdivision.' In this case, the Estate satisfies the basic conditions under Subdivision 152-A of the ITAA 1997. Providing the deceased had not used any portion of the CGT retirement exemption limit previously, the Estate is entitled to choose to disregard, up to a maximum limit of $500,000, on any amount of the capital gain remaining after the Small Business 50% Reduction has been taken into account.