Private ruling: Small business concessions and capital gains tax
Date of advice: 22 January 2018
Published: June 2018
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to the two year period? | A1: No | Q2: Will you be entitled to a partial exemption for a capital gain under 118-200 of the ITAA 1997? | A2: No Issue 2: Small Business CGT Concessions | Q3: Would the deceased have met the basic conditions just prior to the date of death for small business relief under section 152-10 of the ITAA 1997 for their pre-Capital Gains Tax (CGT) interest in the property which was acquired before 20 September 1985? | A3: No | Q4: Would the deceased have met the basic conditions just prior to the date of death for small business relief under section 152-10 of the ITAA 1997 for their post-CGT interest in the property which was acquired after 20 September 1985? | A4: Yes | Q5: Will the Commissioner exercise his discretion under subsection 152-80(3) of the ITAA 1997 and allow an extension of time to the two year period? | A5: No

Relevant facts and circumstances: The property was held which comprised of two titles (Title A and Title B). Certificate for Title A was issued prior to 20 September 1985 and shows the deceased’s ownership as a 50% share as a tenant in common with themselves and their relative (relative A) as joint tenants in the remaining 50% share, pursuant to a transfer dated prior to 20 September 1985. Certificate for Title B was issued prior to 20 September 1985, also shows the deceased’s ownership as a 50% share as a tenant in common with themselves and relative A as joint tenants in the remaining 50% share. The property comprised of over XX hectares of land, located within a rural zone and had been used for horticultural and agricultural purposes during their ownership interest. Over the course of time, improvements were made to the property including a worker’s cottage, an open sided shed and large machinery shed all circa 20 September 1985. There was also horticultural planting undertaken on the property. The main residence was constructed on the property prior to 20 September 1985 and was the principle place of residence for both the deceased and relative A until their deaths. The main residence was left vacant from the deceased’s date of death and no income was generated from the main residence. A small business entity operated on the property as a farm by the deceased and relative A from the date of acquisition. At a later date, a relative (relative B) of both the deceased and relative A, assisted with the operation of the farm and at this time, the net farm income was spilt equally between the deceased, relative A and relative B. Relative A passed away in October 20XX and their interest as joint tenant in the one half share in the property vested to the deceased. The deceased then became the sole owner of the property. The property continued to operate as a farm after the death of relative A by the deceased and relative B. The net farm income at this time was split equally between the deceased and relative B. The deceased passed away in May 20XX and the grant of probate occurred within four months of the date of death. Relative B was named an executor and a beneficiary of the estate of the deceased. There were also several other named beneficiaries of the estate. The property continued to operate as a farm after the death of the deceased by relative B and the net farm income was solely assessable by relative B. Some named beneficiaries of the estate stated that the deceased had indicated to them that due to relative B working and assisting on the property during their life that the deceased wished for relative B to remain on the property for at least two years after their date of death. This was not expressed in the deceased’s Will. Relative B resided in a second dwelling on the property from 20XX until the settlement of the sale of the property and no rent was charged. The beneficiaries had varying views and attitudes regarding the retention, possible sale, most appropriate method of sale and market value of the property. It was practice for all decisions to be made at a gathering where each beneficiary was present. This contributed to delays in the sale of the property. Relative B as executor contacted three real estate agents the same year the deceased passed away, to obtain a valuation for the sale of the property. One of the agents provided a verbal valuation over the phone and did not attend the property to provide a written appraisal. The other two real estate agents did not return contact to relative B. Relative B did not seek to obtain further valuations or advice from real estate agents. To make the property a more viable asset to sell, the nature of the property was changed which caused delays in the sale of the property. The property was advertised for sale privately the same year the deceased passed away. The beneficiaries requested a private sale for financial reasons. Relative B as executor has no records of the property being advertised privately. The first offer on the property was in May 20xx, an increased counter offer was requested by the estate and the increased offer was made in July 20xx. An amount of xxx tonnes of steel was located on the property and was scrapped and a further xxx tonnes of steel was removed by contractors. The additional steel was removed in the contractor’s spare time. The agreement was made in return for the contractors to keep the value of the items removed. This approach was taken to reduce cost to the estate and contributed to delays in the sale of the property. Relative B ceased operation of the farm at the time a contract for a sale of the property was exchanged in August 20xx. This contract of sale was a result of an additional offer to the first offer placed on the property. The property was sold and settlement occurred in September 20xx.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 118-195 | Income Tax Assessment Act 1997 section 118-200 | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 section 152-80

Reasons for decision: Detailed Reasoning - Full Exemption: Subsection 118-195(1) of the ITAA 1997 states that if you own a dwelling in your capacity as trustee of a deceased estate (or it passed to you as a beneficiary of an estate), then you are exempt from tax on any capital gain made on the disposal of the property if: ● the property was acquired by the deceased before 20 September 1985, or ● the property was acquired by the deceased on or after 20 September 1985 and the dwelling was the deceased’s main residence just before the deceased’s death and was not then being used for the purpose of producing assessable income, and ● your ownership interest ends within 2 years of the deceased’s death (the Commissioner has discretion to extend this period in certain circumstances). You have an ownership interest in a property if you have a legal interest in the property. This means that if you sell a property, your ownership interest continues until the date of settlement (rather than the date the contract of sale is signed). The Commissioner can exercise his discretion to extend the two year period if the property is not sold within that time in situations such as where: ● the ownership of a dwelling or a will is challenged; ● the complexity of a deceased estate delays the completion of administration of the estate; ● a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury); or ● settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee’s control | Detailed Reasoning - Application to your circumstances: In this case, the deceased acquired a 75% interest in the property prior to 20 September 1985 and acquired the final 25% interest in the property after relative A passed away in 20xx. The property was the main residence of the deceased until they passed away in 20xx. The dwelling was not disposed on within two years of the deceased’s date of death. A second dwelling on the property was occupied from 20xx up until settlement of the property in 20xx, by relative B. This arrangement was not expressly provided for in the Will. The delays in the sale of the property were not due to circumstances outside of the control of the executor and/or the beneficiaries. Although it was decided to market the property privately, there is no evidence showing a reasonable effort was made to sell or to market the property within two years of the deceased’s death. The executor relative B, contacted three real estate agents to obtain a valuation for the sale of the property where no written valuation was received. There is no evidence showing reasonable effort was made to follow up the valuation or to confirm the companies contacted were suitable to obtain a valuation for the type of property at hand. The arrangement to remove the steel from the property was undertaken to reduce cost to the estate. Accordingly, the Commissioner will not exercise his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension of time to the two year period. | Detailed Reasoning - Partial Exemption: Section 118-200 of the ITAA 1997 specifies that where section 118-195 does not apply, you may be entitled to a partial exemption from any capital gain where you owned a dwelling as the trustee of a deceased estate and the dwelling was the main residence of one or more of the following persons for part of your ownership period: ● the spouse of the deceased immediately before death, or ● an individual who had a right to occupy the dwelling under the deceased's will, or ● an individual who is a beneficiary of the estate if they are disposing of the dwelling. | Detailed Reasoning - Application to your circumstances: In this case, there was no provision in the deceased’s Will specifying the right for an individual to occupy the dwelling. The ownership interest did not pass to relative B or any other beneficiaries of the estate and therefore the dwelling is not deemed the main residence of the beneficiaries, including relative B. You are not entitled to a partial main residence exemption under section 118-200 of the ITAA 1997. | Detailed Reasoning - Basic Conditions: To qualify for the small business CGT concessions, you must satisfy basic conditions that are common to all the concessions which are outlined in subsection 152-10(1). Each concession may have further requirements that must be satisfied for the concession to apply. The basic conditions are: (a) a CGT event happens in relation to an asset that the taxpayer owns (b) the event would have, apart from the application of the small business concessions, resulted in a capital gain (c) one or more of the following applies (i) the taxpayer satisfies the maximum net asset value test (ii) the taxpayer is a "small business entity" for the financial year (iii) the asset is an interest in an asset of a partnership which is a small business entity for the financial year, and the taxpayer is a partner in that partnership, or (iv) the special conditions for passively held assets in sub-sections 152-10(1A) or 152-10(1B) are satisfied in relation to the CGT asset in the financial year and (d) the asset satisfies the active asset test. | Detailed Reasoning - Application to your circumstances: In this case, you do not meet the basic conditions for the pre-CGT interest the deceased acquired before 20 September 1985. Any capital gain that related to the pre-CGT interest would have been disregarded under paragraph 104-10(5) (a) of the ITAA 1997. The pre-CGT interest would not have resulted in a capital gain and accordingly, you cannot access the small business concessions for the pre-CGT interest. As your legal personal representative or a beneficiary in your estate is taken to have acquired the asset on the day you died. The first element of the cost base or reduced cost base is the market value of the asset on the day you died. You meet the basic conditions for the post-CGT interest acquired after 20 September 1985 due to the following: ● a CGT event will occur when the property is disposed of ● you are a small business entity ● we consider the property meets the active asset test as you have held the property for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period As the CGT event occurred more than two years after the deceased’s date of death, you will only be able to apply the concessions to the capital gain made on the post CGT interest if the Commissioner extends the time period in accordance with subsection 152-80(3). | Detailed Reasoning - Small Business CGT Concessions – Extension of the two year period: In determining whether the discretion to allow further time would be exercised, the Commissioner has considered the following factors: ● evidence of an acceptable explanation for the period of the extension requested (and whether it would be fair and equitable in the circumstances to provide such an extension) ● prejudice to the Commissioner which may result from the additional time being allowed (but the mere absence of prejudice is not enough to justify the granting of an extension) ● unsettling of people, other than the Commissioner, or of established practices ● fairness to people in like positions and the wider public interest ● whether any mischief is involved, and ● consequences of the decision. In considering whether to exercise his discretion, the Commissioner needs to be satisfied that there were circumstances beyond your control that prevented you from disposing of the assets within two years. In this case, relative B, resided on the property from 20xx up to the date of settlement of the property in 20xx, this arrangement was not expressly provided for in the Will. The delays in the sale of the property were due to circumstances not outside of the control of the executor and/or the beneficiaries. Although it was decided to market the property privately, there is no evidence showing a reasonable effort was made to sell or to market the property within two years of the deceased’s death. The executor, relative B, contacted three real estate agents to obtain a valuation for the sale of the property where no written valuation was received. There is no evidence showing a reasonable effort was made to follow up the valuation or to confirm the companies contacted were suitable to obtain a valuation for the type of property at hand. The arrangement to remove the steel from the property was undertaken to reduce cost to the estate. Accordingly, the Commissioner will not exercise his discretion under subsection152-80(3) of the ITAA 1997 and allow an extension of time to the two year period.