Private ruling: CGT - small business 15 year exemption
Date of advice: 7 September 2021
Published: November 2021
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the deceased estate entitled to the capital gains tax small business 15 year exemption on the sale of the property? | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 section 152-80 | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 Subdivision 152-B

Reasons for decision: Summary: Small business capital gains tax concessions The capital gains tax (CGT) provisions provide some small business relief in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997). Basic conditions To qualify for the small business CGT concessions, the basic conditions as contained in subdivision 152-A of the ITAA 1997 must be satisfied. The basic conditions are: • A CGT event happens in relation to a CGT asset of yours in an income year, • The event would have resulted in a gain, • The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and • At least one of the following applies; - you are a small business entity for the income year, - you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997, - 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, or - you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you. Active asset test As outlined in subdivision 152-A of the ITAA 1997, the CGT asset must satisfy the active asset test. Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy the active asset test if: (a) you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period, or (b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the test period. Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you. Subsection 152-40(4) of the ITAA 1997 provides some exclusions. None of the exclusions are relevant for the deceased estate. Small business entity An entity is a CGT small business entity if: (a) it carries on a business in the current year, and (b) one or both of the following applies: (i) it carried on a business in the income year (the previous year) before the current year and its aggregated turnover for the previous year was less than $2m, and (ii) its aggregated turnover for the current year is likely to be less than $2m (subsections 152-10(1AA) and 328-110(1) of the ITAA 1997). Small business capital gains tax 15 year exemption Subdivision 152-B of the ITAA 1997 outlines the conditions that need to be met for a capital gain to be disregarded under the small business 15 year exemption. Under section 152-105 of the ITAA 1997, an individual can disregard any capital gain arising from the disposal of a CGT asset such as a property, if all of the following conditions are satisfied: • the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain, • you continuously owned the CGT asset for the 15-year period ending just before the CGT event, and • you are 55 or over at the time of the CGT event and the event happens in connection with your retirement. Under section 152-80 of the ITAA 1997 the legal personal representative of a deceased estate may be eligible for small business capital gains tax (CGT) concessions in respect of the sale of the deceased's CGT asset if you make a capital gain on the asset within two years of the person's death. The deceased estate 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. In this case, the following details are relevant: • The deceased was carrying on a business in the relevant year and satisfies the aggregated turnover requirement. Therefore, the deceased is regarded as a small business entity for Division 152 of the ITAA 1997 purposes. • The property was owned for over 15 years and was an active asset for more than 7.5 years. • The deceased satisfied the basic conditions. • The deceased was over 55 years of age at their death. As the deceased was entitled to the 15 year exemption just before their death and the property was sold within two years from the date of death, the deceased estate is eligible for the 15 year exemption. The Commissioner considers that the conditions under Subdivision 152-A and Subdivision 152-B of the ITAA 1997 are satisfied. Therefore the deceased estate is entitled to the 15 year exemption and any capital gain made on the sale of the property is disregarded. Please note that the dwelling on the property is not regarded as a separate CGT asset and forms part of the property sold. Therefore the CGT for the entire property, including the dwelling is exempt under Subdivision 152-B of the ITAA 1997.

Relevant facts: The deceased purchased the property situated at xxxx on xxxx. The property is xxxx hectares. | The deceased passed away on xxxx with a valid Will. | The deceased was over 55 years of age at the date of death and was not permanently incapacitated. | Probate was granted to entity A on xxxx. | The deceased carried on a business prior to their death. | The deceased was registered for GST and had an ABN due to the business activities conducted whilst the deceased was alive. | The deceased estate was registered for GST and had an ABN since xxxx as the estate continued carrying on the business activities of the deceased. | The property was used by the deceased for business activities at the time of the deceased's death. | The property was also used by entity A for business activities whilst administering the estate of the deceased. | The property has a dwelling on it as well as other structures. | The dwelling was xxx square metres. The dwelling was not used as the main residence of the deceased. | The dwelling was used by the deceased when they visited the property to check on their business activities. They would stay in the dwelling whilst visiting the property and would conduct their business operations from the dwelling. | No employees or caretakers of the property resided on the property. | The dwelling was in poor condition, having not been well maintained aside from when the deceased visited the property. | The entire property was sold as a going concern on xxxx. Settlement occurred on xxxx. | The deceased estate carried on a business up until the property sale occurred. | Aggregated sales in the 20XX-XX income year was less than $2 million. | The aggregated turnover was also less than $2 million for the 20XX-XX and 20XX-XX income years. | The net asset value of the business is less than $6 million in the 20XX-XX income year. | The property was an active asset, given that the entire land was used by in the business. The dwelling was also used on the occasions that the deceased frequented the property and was used in conjunction with their business activities. | The property was an active asset for more than 7.5 years.