Private ruling: Small business concessions
Date of advice: 23 July 2020
Published: August 2020
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the time limit to 9 August 2016 for the disposal of the property? | A1: Yes. Having considered your circumstances and the relevant factors, the Commissioner is able to apply the discretion under subsection 152-80(3) of the ITAA 1997 and allow an extension of time to XXXX for the disposal of the property.

Relevant facts and circumstances: The deceased passed away. The deceased's last will and testament was dated XXXX. The deceased purchased the farming property at the property in stages: · Lot 1 acquired prior to 20 September 1985 · Lot 2 acquired prior to 20 September 1985 · Lot 3 acquired XXXX Lot 1, 2 and 3 were sold collectively. The property was then transferred to the estate before sale. The deceased operated a farming business from the property. The property was also the deceased's main residence. The estate administration was a complicated progress due to family complications and poor record keeping. Additional family disputes arouse further complicating the executor's attempts to finalise the administration of the estate. These disputes were finalised. Additionally, the executor experienced multiple personal and medical complications.

Relevant legislative provisions: Income Tax Assessment Act 1997, s152-80(3) | Income Tax Assessment Act 1997, s118-110 | Income Tax Assessment Act 1997, s118-130 | Income Tax Assessment Act 1997, s118-195 | Income Tax Assessment Act 1997, s106-50 | Income Tax Assessment Act 1997, s 118-125 Detailed reasoning | Small business CGT Concessions | In many cases the small business CGT concessions are available to the person or entity disposing of an asset. There are certain conditions around turnover and maximum net asset values that must be met to access these concessions. In general terms, turnover of the family group needs to be less than $2 million in the year of disposal of the asset and/or have net assets less than $6 million. Importantly, it should be noted that the definition of a 'small business' for CGT small business concessions is different to that of the general definition of a 'small business entity' for tax purposes. | An 'active asset' test must also be passed in order for the asset (such as farmland) to be deemed eligible for the concessions. In general terms, this means that farmland, for example, must be used in farming for a specified period of time during the period of ownership to qualify for the concessions. Passive investments, such as shares and land that has been leased and not farmed, would not meet the active asset requirement and therefore would not qualify for the small business concessions. | The four concessions are: | 1. the 50 per cent active assets exemption; | 2. the 15-year asset exemption; | 3. the retirement exemption; and | 4. the business asset rollover concession. | The beneficiary of the deceased estate will be eligible for the small business CGT concessions where: | · the asset is disposed of within two years of the date of death (although we may allow a longer period by granting an extension of time), and | · the asset would have qualified for the small business CGT concessions if the deceased had disposed of the asset immediately before their death. | Provided these conditions are satisfied, the small business CGT concessions are also available to the trustee of a trust established by the will of the deceased, a beneficiary of such a trust, and a surviving joint tenant. | Main residence exemption | Subdivision 118-B of the ITAA97 establishes the main residence exemption. Section 118-125 provides that the ownership period of a dwelling is the period on or after 20 September 1985 when you had an ownership interest in: | (a) the dwelling; or | (b) land (acquired on or after 20 September 1985) on which the dwelling is later built. | The main residence exemption can only be claimed in respect of a maximum area of 2 hectares. In respect of a property that exceeds this area, the taxpayer can choose the part of the property for which he or she will claim the exemption. | It is possible to apply the main residence exemption in Subdivision 118-B of the ITAA 1997 to whichever part of land you choose provided the area of the land does not exceed 2 hectares. A capital gain or loss made from land is only disregarded under these provisions if the land is used primarily for private or domestic purposes in association with the dwelling. Therefore, in respect of a large farm, the taxpayer may nominate the 2 hectares as including the area occupied by the farmhouse. The remainder is subject to CGT. | Land adjacent to a dwelling may also qualify for the main residence exemption if it is close to, near, adjoining or neighbouring the dwelling. The land a dwelling is actually on is included as part of the dwelling and is not part of adjacent land. | If any part of the land around a dwelling is used to produce income, it is not exempt, even if the total land area is less than two hectares. | Section 118-130 of the ITAA97 provides the meaning of ownership interest in land or a dwelling in that: | (1) You have an ownership interest in land or a * dwelling if: | (a) for land-you have a legal or equitable interest in it or a right to occupy it; or | (b) for a dwelling that is not a flat or home unit-you have a legal or equitable interest in the land on which it is erected, or a licence or right to occupy it; or | (c) for a flat or home unit-you have: | (i) a legal or equitable interest in a * stratum unit in it; or | (ii) a licence or right to occupy it; or | (iii) a share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected and that gives you to a right to occupy it. | Section 118-110 of the ITAA97 establishes the "basic case" for a capital gain to be disregarded under the main residence exemption. It provides: | (1) A * capital gain or * capital loss you make from a * CGT event that happens in relation to a * CGT asset that is a * dwelling or your * ownership interest in it is disregarded if: | (a) you are an individual; and | (b) the dwelling was your main residence throughout your * ownership period; and | (c) the interest did not * pass to you as a beneficiary in, and you did not * acquire it as a trustee of, the estate of a deceased person. | Main residence exemption is only available to natural persons/ individuals - trusts and companies cannot claim main residence exemption. For the beneficiary in respect to s104-75(5) of the ITAA97, it makes a capital gain if the market value of the asset (at the time of the event) is more than the cost base of the beneficiary's interest in the trust capital to the extent it relates to the asset. It makes a capital loss if that market value is less than the reduced cost base of that beneficiary's interest in the trust capital to the extent it relates to the asset. | There are also exceptions to this under s104-75(6), where a capital gain or capital loss the beneficiary makes is disregarded if: | (a) the beneficiary acquired the CGT asset that is the interest (except by way of an assignment from another entity) for no expenditure; or | (b) the beneficiary acquired it before 20 September 1985; or | (c) all or part of the capital gain or capital loss the trustee makes from the CGT event is disregarded under Subdivision 118-B (about main residence). | Calculation of CGT | For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset. (The cost base of a CGT asset is largely what you paid for it, together with some other costs associated with acquiring, holding and disposing of it.) | There are three methods for working out your capital gain. You can choose the method that gives you the best result - that is, the smallest capital gain. | · CGT discount method | For assets held for 12months or more before the relevant CGT event. It is not available to companies. For foreign resident individuals, the 50% discount is removed or reduced on capital gains made after 8May 2012. | Subtract the cost base from the capital proceeds, deduct any capital losses, then reduce by the relevant discount percentage. | · Indexation method | For assets acquired before 11.45am (by legal time in the ACT) on 21September 1999 and held for 12 months or more before the relevant CGT event. This allows you to increase the cost base by applying an indexation factor based on the consumer price index (CPI) up to September 1999. | Apply the relevant indexation factor, then subtract the indexed cost base from the capital proceeds. | · Other method | For assets held for less than 12 months before the relevant CGT event. This method is the simplest of the three methods for calculating a capital gain. You must use this method to calculate your capital gain if you have bought and sold your asset within 12 months. | Generally, to use the 'other' method, you simply subtract your cost base from your capital proceeds. The amount of proceeds left is your capital gain.