Private ruling: Income Tax – Small Business Concessions – Deceased Estate
Date of advice: 5 August 2017
Published: November 2017
Ruling period: Year ended 30 June 201C | Year ending 30 June 201D | Year ending 30 June 201E
Date scheme commenced: 201B

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 and allow extra time to apply the small business capital gains tax (CGT) concessions to any capital gain made upon entering into the Deed of Put and Call Option? | A1: Yes. | Q2: Will the Commissioner exercise his discretion under subsection 152-80(3) of the ITAA 1997 and allow extra time to apply the small business CGT concessions to any capital gain made on the sale of the deceased’s post CGT interest in the property? | A2: Yes.

Relevant facts and circumstances: The deceased and a spouse purchased a property. This property has been used in the course of a business since it was acquired. This business was initially operated as a partnership between the deceased and a spouse. The deceased’s spouse passed away and the deceased became the sole owner of the property. The deceased passed away. The deceased would have been entitled to apply the small business concessions to any capital gain made on their post CGT interest in the property had they disposed of it just prior to their death. It is located between two buildings. The property was advertised for sale. The original offer was accepted just over a month after the deceased passed away. The first delay of approximately X months was due to the fact that probate had not yet been granted. The next delay was caused by the buyer as they had bought two properties using cash and could no longer afford it immediately. The buyer was then overseas and provided various excuses to further delay the sale. Once negotiations stalled with this buyer you again listed the property on the market for sale. At this point the original buyer again entered negotiations to purchase. Just over 2 years after the deceased passed away you entered into a contract to sell the asset. There is no written agreement evidencing the fact that you and the purchaser have agreed that the supply of the business is the supply of a going concern.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-40 | Income Tax Assessment Act 1997 subsection 104-40(5) | Income Tax Assessment Act 1997 section 116-20 | Income Tax Assessment Act 1997 section 128-15 | Income Tax Assessment Act 1997 section 128-50 | Income Tax Assessment Act 1997 paragraph 152-10(1)(a) | Income Tax Assessment Act 1997 paragraph 152-10(1)(d) | Income Tax Assessment Act 1997 section 152-80 | Income Tax Assessment Act 1997 subsection 152-80(3) | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 subdivision 38-J | A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(1)

Reasons for decision: Summary: Inheriting a property Section 128-50 of the ITAA 1997 considers the effect of death for property held by joint tenants. If the joint tenant who dies acquired their interest in the asset before 20 September 1985 , the first element of the cost base of the interest you acquire from them is the market value of their interest on the day they died , divided by the number of joint tenants (including you) who acquire it. The first element of the reduced cost base of the interest you acquire from them is worked out similarly. In this case, the deceased and their late spouse purchased a property as joint tenants prior to 20 September 1985. The deceased’s spouse passed away in 199A and the deceased became the sole owner of the property. In accordance with provision 128-50 of the ITAA 1997 the deceased’s cost base for this portion of the property will be equal to the market value on the day their spouse passed away. Therefore, the deceased held 50% as a pre CGT asset and the other 50% of the property as a post CGT asset. Section 128-15 of the ITAA 1997 explains the cost base rules for the legal personal representative or beneficiary of an estate. Where the asset was acquired by the deceased after 20 September 1985 the first element of the cost base, in the hands of the LPR or beneficiary, is the cost base of the asset on the day of death. If the asset was acquired before 20 September 1985 the first element of the cost base is the market value of the asset on the day of death. Therefore, the cost base for the 50% of the property acquired after 20 September 1985 will be equal to the deceased’s cost base. As discussed above this will be the market value of the property as at the date of death of the deceased’s late spouse. For the remaining 50% of the property which was acquired prior to 20 September 1985 the cost base will be equal to the market value as at the date of death of the deceased. Granting an option CGT event D2 occurs if you grant an option to an entity (section 104-40 of the ITAA 1997). The timing of the event is when you enter into the option. Accordingly, CGT event D2 will occur when you enter into the Deed of Option. The capital proceeds for the event will be any amount you receive or are entitled to receive under the Deed of Option, including the weekly option payments (section 116-20 of the ITAA 1997). As per paragraph 115-25(3) of the ITAA 1997, any capital gain or loss from CGT event D2 is not a discount capital gain. However, any capital gain or loss made from CGT event D2 can be disregarded if the option in exercised (subsection 104-40(5) of the ITAA 1997). If the exercising of the option results in the disposal of an asset (CGT event A1), your capital proceeds for the A1 event will include any payment you received for granting the option (section 116-65 of the ITAA 1997). Accordingly, if the option is exercised by the buyer you can disregard any capital gain from CGT event D2. If the tax return for the relevant year has already been lodged, you will need to amend your return to exclude the amount relating to the D2 event. CGT event A1 will occur as you will have disposed of the Property; the timing of the event will be the date of the contract for the disposal (CGT Determination TD 16). Your capital proceeds for CGT event A1 will include all of the weekly option payments paid by the buyer. ATO ID 2011/45 considers whether the small business capital gains tax concessions can apply to a capital gain made from CGT event D2. It states that: The first condition in paragraph 152-10(1)(a) of the ITAA 1997 requires that the CGT event happens in relation to a CGT asset of the taxpayer. The fourth condition in paragraph 152-10(1)(d) of the ITAA 1997 requires that the CGT asset satisfies the active asset test. With respect to the first condition it is considered the words 'in relation to' in paragraph 152-10(1)(a) of the ITAA 1997 are wide enough to allow reference to an underlying asset such as the land in relation to which the option has been granted. They are also wide enough to allow reference to land in relation to which an option to acquire an easement over the land has been granted. Therefore, if CGT event D2 happens, that event can be said to happen in relation to a CGT asset of the taxpayer, being the land in relation to which the option has been granted, and accordingly paragraph 152-10(1)(a) of the ITAA 1997 can be satisfied. In this case, the underlying asset (the property) satisfies the active asset test in paragraph 152-10(1)(d) of the ITAA 1997. Therefore, any capital gain made from entering into the Deed of Put and Call Option can qualify for small business capital gains tax relief. CGT event D2 occurred when you entered into the Deed of Put and Call Option with the buyer. Note that this capital gain can be disregarded when/if the option is exercised by the buyer. Small business concessions 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 asset has passed to the legal personal representative and the deceased would have been able to apply the small business concessions to the property just prior to their death. In determining if the Commissioner should use his discretion to allow an extension of time the following will be considered: ● 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 this case, the original offer was accepted just over a month after the deceased passed away. The purchaser delayed the progression of the sale for various reasons that were beyond your control. Eventually the property was advertised for sale again and the original purchaser re-entered negotiations. You entered into a Deed of Put and Call Option with the purchaser as they do not wish to acquire the property straight away. The Deed requires contract and settlement of the property to occur by 20XX. Having considered the relevant facts, the Commissioner is able to apply his discretion under subsection 152-80(3) of the ITAA 1997 and allow an extension to the time limit. Therefore, you are entitled to apply the small business concessions to any capital gain made from CGT event D2 discussed above. Further, should the option be exercised by the buyer (by 20XX) you are entitled to apply the small business concessions to any capital gain made on the disposal of 50% interest that was a post CGT interest for the deceased. | Detailed Reasoning - Additional information – pre CGT interest: Note that the 50% pre CGT interest held by the deceased would not have qualified for the small business capital gains tax concessions had he disposed of it just prior to his death. The conditions for the small business concessions require you to make a capital gain. The deceased would not have made a capital gain when they disposed of this portion of the property as it would have been exempt under subsection 104-10(5) of the ITAA 1997.