Private ruling: Small business capital gains tax concessions
Date of advice: 14 September 2016
Published: November 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Would the deceased have been entitled to apply the 15-year exemption to any capital gain made on the disposal of the second 50% share in the property had they disposed of it just prior to their death? | A1: Yes. | Q2: Can the Trustee for the Estate apply the 15-year exemption to any capital gain made on the disposal of the second 50% share in the property? | A2: Yes.

Relevant facts and circumstances: The deceased acquired a 50% interest in the property in 196X, as tenants in common with Person A. When person A passed away in 199X, the deceased became the owner of the second 50% share in the property. A company operated a farming business on the property. The company was the corporate trustee of the Family trust. The company paid rent for the use of the land, and were responsible for the payment of all outgoings and maintenance costs. The company shareholders and joint directors were the deceased and their spouse. The deceased was the principal executive officer of the company. The trust deed identifies the deceased as having the power to appoint a new trustee of the trust, or remove any trustee of the trust. When the deceased's spouse passed away it was then decided that the trust and company, would be wound up. After this, the deceased continued to carry on the farming enterprise as a sole trader.

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, and | Income Tax Assessment Act 1997 section 152-110.

Reasons for decision: Summary: When a taxpayer acquires a CGT asset, including acquisition by inheritance, they are potentially liable for tax on any capital gain on that asset when a CGT event subsequently happens to it. Section 152-80 of the ITAA 1997 allows either the legal personal representative of an estate or the beneficiary to apply the small business CGT concessions in respect of the sale of the deceased's asset in certain circumstances. Specifically, the following conditions must be met: • the asset devolves to the legal personal representative or passes to a beneficiary, and • the deceased would have been able to apply the small business concessions themselves immediately prior to their death, and • a CGT event happens within 2 years of the deceased's death unless the Commissioner extends the time period in accordance with subsection 152-80(3) of the ITAA 1997. In this case, the deceased passed away and the asset has become part of their Estate. We must now consider whether the deceased would have been able to apply the small business concessions to the property just prior to their death. Basic conditions To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. Division 152-C applied the small business 50% active asset reduction provided the basic conditions are satisfied. A capital gain that you make may be reduced or disregarded under Division 152 if the following basic conditions are satisfied: (a) a CGT event happens in relation to a CGT asset of yours in an income year; (b) the event would have resulted in the 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; (iii) you are a partner in a partnership that is a 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). Active asset test This test requires the CGT asset to be an active asset for: • 7 years, if owned for more than 15 years, or • half of the ownership period if owned for 15 years or less (section 152-35). A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, you affiliates, your spouse or child or an entity connected with you. Connected with - control of a discretionary trust An entity is connected with another entity if: • either entity controls the other entity, or • both entities are controlled by the same third entity. An entity controls a discretionary trust if the trustee either acts, or might reasonable by expected to act, in accordance with the directions or wishes of the entity or the entity's affiliates, or both the entity and its affiliates. | Detailed Reasoning - Application to your circumstances: In this case, we accept that the deceased satisfied the maximum net asset value test just prior to their death. There were two periods of ownership that need to be considered for the purposes of the active asset test. Given the information provided we accept that the trust was connected with the deceased. As the property was used in the course of carrying on a business by an entity connected with the deceased for more than half the ownership period the active asset test has been satisfied. Therefore, the basic conditions in relation to the second 50% share in the property would have been satisfied by the deceased just prior to their death. Death and the 15-year exemption Section 152-110 of the ITAA 1997 provides a small business 15-year exemption for individuals. Under this section, an individual can disregard the capital gain from the disposal of a CGT asset if: (a) the basic conditions in subdivision 152-A of the ITAA 1997 are satisfied, (b) the individual continuously owned the CGT asset for the 15-year period ending just before the CGT event, (c) if the CGT asset is a share in a company or an interest in a trust, the company or trust had a significant individual for a total of at least 15 years, and (d) either: (i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement, or (ii) you are permanently incapacitated at the time of the CGT event. In the case of a deceased individual, the beneficiary or legal personal representative will be eligible for the 15-year exemption to the same extent that the deceased would have been just prior to their death, except that: • the CGT event does not need to be in connection with the retirement of the deceased, and • the deceased needs to have been 55 years or older immediately before their death, rather than at the time of the CGT event. As discussed above, the deceased satisfied the basic conditions for the small business concessions. Further, they owned the asset continuously for more than 15 years and were more than 55 years of age at the time of their death. We accept the deceased would have been entitled to apply the 15-year exemption had he disposed of the property just prior to their death. As the Estate disposed of the property within two years of the date of death the executor can also apply the 15-year exemption to any capital gain made on the second 50% interest in the property.