Private ruling: Small business capital gains tax concessions
Published: February 2014
Ruling period: Year ended 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Would the deceased have been entitled to apply the 15 year exemption just prior to their death? | A1: Yes. | Q2: Will the Commissioner exercise his discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow extra time for the beneficiaries to apply the small business capital gains tax (CGT)? | A2: Yes. Issue 2 The interest held by the deceased for less than 15 years | Q3: Would the deceased have been entitled to apply the 15 year exemption just prior to their death? | A3: No. | Q4: Will the Commissioner exercise his discretion under subsection 152-80(3) of the ITAA 1997 and allow extra time for the beneficiaries to apply the small business CGT concessions? | A4: No.

Relevant facts and circumstances: The deceased and their late spouse acquired a property made up of multiple Lots. The properties were used in the course of carrying on a business. During the 19XX financial year, the deceased's spouse passed away. The late spouses' 50% interest in the property passed to the deceased at this time. The deceased continued carrying out activities as a sole trader on a decreasing scale. The deceased did not register for GST. The deceased's income tax returns disclose business activities up until the 20XX financial year. From the 20YY financial year until the deceased passed away, there were no business activities disclosed in the deceased's income tax returns. The deceased's turnover at no time exceeded $2 million. The deceased satisfied the maximum net asset value test just prior to their death. The deceased passed away during the relevant financial year. The deceased was more than 55 years of age. Some Lots were sold within two years of the deceased's date of death. However, the executors have found it difficult to sell the remaining lots without building approval from the Council. The executors lodged a development application on behalf of the estate to provide potential purchasers with certainty. The process has taken a considerable amount of time.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Subdivision 152-B | Income Tax Assessment Act 1997 Subdivision 152-C | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subsection 152-40(4) | Income Tax Assessment Act 1997 section 152-80 | Income Tax Assessment Act 1997 subsection 152-80(2) | Income Tax Assessment Act 1997 subsection 152-80(3) | Income Tax Assessment Act 1997 section 152-105

Reasons for decision: Detailed Reasoning - Issue 1: The interest held by the deceased for more than 15 years *All legislative references contained are to the Income Tax Assessment Act 1997 . | Detailed Reasoning - Question 1: 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. 15 year exemption To qualify for the 15 year exemption in Subdivision 152-B, you must satisfy the basic conditions and have continuously owned the CGT asset for the 15 year period ending just before the CGT event happened. Under subsection 152-80(2), an entity 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 · the deceased needs to have been 55 or older immediately before their death, rather than at the time of the CGT event. Application to your circumstances In this case, the deceased satisfied the maximum net asset value test just prior to their death. This interest in the property was used in the course of carrying on a business for at least 7 and a half years during the entire ownership period. Further the deceased was more than 55 years of age. Therefore, the deceased would have been entitled to apply the small business 15 year exemption. | Detailed Reasoning - Question 2: Section 152-80 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 two years of the deceased's death unless the Commissioner extends the time period in accordance with subsection 152-80(3). 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. Application to your circumstances In this case, the executors have found it difficult to sell the properties without development approval from the local council. Having considered the relevant facts, the Commissioner is able to apply his discretion under subsection 152-80(3) and allow an extension to the time limit. Allowing an extension is not prejudicial to the Commissioner in this case nor is it unfair to other people in similar positions. | Detailed Reasoning - Issue 2: The interest in the property held by the deceased for less than 15 years | Detailed Reasoning - Question 1: In this case, the deceased satisfied the maximum net asset value test just prior to their death. The properties were held for less than 15 years and did not satisfy the active asset test as they were not used in the course of carrying on a business for more than half the ownership period. Therefore the deceased would not have been entitled to apply the small business 15 year exemption. | Detailed Reasoning - Question 2: As the deceased was not entitled to apply the small business CGT concessions just prior to their death, we do not need to consider granting an extension of time.