Private ruling: Capital gains tax small business concessions
Date of advice: 19 December 2018
Published: April 2019
Ruling period: Year ended 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the Commissioner allow an extension of time under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) for you to dispose of the 50% interest in property A that the deceased acquired (post CGT interest in property A)? | A1: Yes | Q2: Will the Commissioner allow an extension of time under subsection 152-80(3) of the ITAA 1997 for you to dispose of the 50% interest in the property B and C that the deceased acquired (post CGT interest in property B and C)? | A2: Yes | Q3: Could the deceased have accessed the capital gains tax (CGT) small business concessions in relation to the 50% interest in property A, B and C that they acquired prior to 20 September 1985 (pre CGT interest in property A, B and C)? | A3: No | Q4: Can you access the 50% small business active asset reduction and the small business retirement exemption under section 152-80 of the ITAA 1997 in relation to the post CGT interests in property A, B and C? | A4: Yes | Q5: Can you access the 50% small business active asset reduction in relation to the pre CGT interests in property A, B and C? | A5: Yes

Relevant facts and circumstances: The deceased purchased three lots of farm land on three separate titles before 20 September 1985; pre CGT in a joint ownership in equal shares; properties A, B and C. The deceased operated a small business entity as a sole trader before 20 September 1985. The deceased acquired 100% sole ownership in 20XX, making the deceased’s interest 50% pre CGT and 50% post CGT on properties A, B, and C. The deceased continued to operate the small business entity as a sole trader until their date of death in 20XX. From the deceased’s date of death, the executors who were appointed to the deceased’s estate continued to run the business through the estate up until the properties were disposed of. The estate was a small business entity. The business was on land over 50 hectares and it took considerable amount of time to prepare the land for sale and wind back the business operations. The properties were placed on the market as soon as practicable after the deceased’s date of death. Once the properties were placed on the market, no acceptable offers were initially received. Property A was sold in 20XX and properties B & C were sold in 20XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 Division 128 | Income Tax Assessment Act 1997 section 128-15 | Income Tax Assessment Act 1997 section 128-50 | Income Tax Assessment Act 1997 s ection 152-35 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 section 152-80 | Income Tax Assessment Act 1997 section 152-305

Reasons for decision: Detailed Reasoning - Small business concessions – basic conditions: There are four CGT concessions available to small businesses. These concessions may apply to CGT events that happen after 21 September 1999. Any capital gain that results from a CGT event may be reduced or disregarded under these concessions if you satisfy certain conditions. The four concessions are: ● small business 15-year exemption ● small business 50% active asset reduction ● small business retirement exemption; and ● small business rollover Section 152-10 of the Income Tax Assessment Act 1997 (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 (apart from the application of Division 152) have resulted in a capital 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. | Detailed Reasoning - Additional conditions for each concession: If the basic conditions above are satisfied, there are additional requirements to consider for each of the concessions: ● 15-year exemption – If you are an individual, you must have owned the asset for the 15-year period ending just before the CGT event, you must be over 55 at the time of the event and the event must be in connection with your retirement. If you meet these additional conditions, you can entirely disregard the capital gain and you do not have to apply for any other concessions. ● 50% active asset reduction – there are no additional conditions. If the basic conditions are satisfied, this concession provides a 50% reduction of the capital gain. ● Retirement exemption – if you are over 55 at the time of making a choice to apply the retirement exemption the only additional requirement is that you keep a record of the amount you chose to disregard. The amount you choose to disregard must not exceed your CGT retirement exemption limit of $500,000. ● Rollover – you can choose to apply to rollover to all or part of a capital gain if the basic conditions are met. Further CGT events will occur subsequent to choosing the rollover if you don’t meet additional requirements such as acquiring a new active within a specified period. | Detailed Reasoning - Deceased’s entitlement to small business concessions: Section 152-80 of the ITAA 1997 allows the legal personal representative (LPR) of the deceased to apply the small business CGT concessions if the conditions set out in subsection 152-80(1) of the ITAA 1997 are satisfied: ● the asset forms part of the estate ● the asset devolves to the individual’s LPR ● the deceased would have been entitled to reduce or disregard a capital gain under Division 152 of the ITAA 1997 if a CGT event had happened in relation to the CGT asset immediately before his or her death, and ● a CGT event happens in relation to the CGT asset within two years of the individual’s death. The two year time limit prescribed may be extended by the Commissioner in certain circumstances (subsection 152-80(3) of the ITAA 1997). In determining whether a longer period will be allowed, the Commissioner will consider a range of factors such as: ● whether there is evidence of an acceptable explanation for the period of extension requested and whether it would be fair and equitable in the circumstances to provide such an extension; ● whether there is any prejudice to the Commissioner if the additional time is allowed, however the mere absence of prejudice is not enough to justify the granting of an extension; ● whether there is any unsettling of people, other than the Commissioner, or of established practices; ● fairness to people in like positions and the wider public interest; ● whether there is any mischief involved; and ● the consequences of the decision. | Detailed Reasoning - Application to your circumstances: Section 152-80 of the ITAA 1997 requires an examination of the extent to which the deceased would have been able to apply the CGT small business concessions if a CGT event happened in relation to the relevant asset immediately before their death. As the deceased had two separate interests in property A, B and C (pre and post CGT) they will be considered separately below. | Detailed Reasoning - Pre CGT: The deceased purchased three lots of farmland pre CGT in joint ownership, each having a 50% interest in property A, B and C. A basic condition for the small business concessions is that the event would (apart from the application of Division 152 of the ITAA 1997) have resulted in a capital gain. If the deceased had disposed of the pre CGT interests in property A, B and C immediately before their death, any capital gain would have been disregarded under paragraph 104-10(5)(a) of the ITAA 1997. Accordingly the deceased could not have accessed any of the small business concessions in relation to the pre CGT interests they held in property A, B or C. | Detailed Reasoning - Post-CGT: The deceased acquired the remaining 50% interest in these properties in 20XX (post CGT interest). We consider the deceased’s post CGT interest in property A, B and C, would have satisfied the basic conditions for the small business had they disposed of those interests immediately prior to their death on the following basis: ● the deceased was a small business entity trading as an individual; and ● property A, B and C satisfied the active asset test. Additionally, the deceased was over 55 years of age. The deceased was therefore eligible to access the following small business concessions: ● 50% active asset reduction; and ● small business retirement exemption (up to the $500,000 lifetime limit). As the deceased did not hold their pre CGT interests in property A, B and C for more than 15 years, they would not have been able to access the small business 15 year exemption. | Detailed Reasoning - Extension of time: Given the deceased would not have been able to access the small business concessions in relation to their pre CGT interests in property A, B and C the Commissioner cannot consider the discretion available under subsection 152-80(3) of the ITAA 1997 for these interests. However, the Commissioner has considered all the facts and circumstances and allowed an extension of time under subsection 152-80(3) of the ITAA 1997 for property A and properties B and C in relation to the deceased’s post CGT interests. Accordingly, the estate can access the concessions to the extent the deceased could have as determined above, being the 50% active asset reduction and the small business retirement exemption (up to the $500,000 lifetime limit). | Detailed Reasoning - Questions 4 and 5: Following the deceased’s death, the business continued to trade through the estate as a small business entity and the properties satisfied the active asset test. Accordingly, the estate can apply the small business 50% active asset reduction in relation to the pre-CGT interests in property A, B and C.