Private ruling: Capital gains tax and deceased estates
Published: June 2015
Ruling period: Year ended 30 June 2014.
Date scheme commenced: 1 July 2013.

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 allow the small business capital gains tax (CGT) concessions to be applied? | A1: Yes.

Relevant facts and circumstances: The deceased passed away in the 2010-11 financial year. The deceased purchased a share of the property in 19XX. The deceased's spouse also purchased a share in the same property. The deceased inherited their spouse's share after the spouse passed away after 20 September 1985. The property consists of several floors. The ground floor was leased out to an arm's length tenant while the remaining floors were used by the ABC business. From 19YY until the 2012-13 financial year, ABC business operated through the ABC Family Trust. The property was mainly used by the ABC Family Trust for more than 30 years to carry on the business operations of ABC business. You therefore submit that the property is an active asset. The ABC Family Trust had business turnover of less than $2 million in the past Z financial years and you submit it is a small business entity. The deceased received at least 40% of the trust distributions in the last years of their life. You claim that the ABC Family Trust was therefore a connected entity to the deceased prior to their death. It took longer to sell the property due to complications in administering the Will. Probate was granted in the 2011-12 financial year. The Will contained complicated equalisation formulas to provide a bequest to each of the deceased's X number of grandchildren and a property had to be sold to meet this requirement. Clause 6 of the Will contains a complex formula in relation to bequests to the deceased's grandchildren. Each grandchild was to receive $X less the net assets of their respective trusts as named in the Will with adjustments for net trust balances of the grandchild in a number of other trusts (subject to indexation formulas) upon the grandchild turning 35. There are X number of grandchildren, X number of which have their own trusts (Clause 6 (a) to (f) of the Will), and X number over age 35 and the remainder under 35. There are also other trusts which are relevant to the adjustment calculations (final paragraph of clause 6 of the Will). This part of the Will required preparation of X number of sets of accounts (X number of the grandchildren's trusts as well as the other trusts). It also required valuation of the net assets of the X number of the grandchildren's trusts by a qualified valuer. Additionally, the Will required the purchase of the ABC business by a beneficiary which also had to be evaluated prior to the transfer of ownership. Once a decision was made to sell the property in order to meet the payout for the grandchildren, a lengthy international marketing campaign had to be undertaken in order to gauge the value of the property. The vendor commenced interviewing prospective real estate agents in the 2013-14 financial year and authority for the real estate agent was given a month later. A contract to sell the property was signed a number of months later, and the property settled the following month. You submit that the process, although commenced as soon as possible, took significantly longer than anticipated. Furthermore you contend that the time period from date of death to value each grandchild's trust as stipulated in clause 6 of the Will was clearly not possible. You request an extension of the two year limit for disposal of the property. You accept that any remaining assets in the estate would not be subject to any such extension.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 152-80(3).

Reasons for decision: Summary: 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: n the asset devolves to the legal personal representative or passes to a beneficiary n the deceased would have been able to apply the small business concessions themselves if they had disposed of the asset immediately prior to their death, and n 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. The Commissioner may exercise his discretion to allow an extension of time under subsection 152-80(3) of the ITAA 1997 in situations such as where: • there is a significant delay in obtaining probate • the will is contested or challenged; • the complexity of a deceased estate delays the completion of administration of the estate; • a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury); or • settlement of a contract of sale is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control. In determining whether the discretion to allow further time would be exercised, the Commissioner has considered the following factors: n 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) n 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) n unsettling of people, other than the Commissioner, or of established practices n fairness to people in like positions and the wider public interest n whether any mischief is involved, and n consequences of the decision. In your case, administration of the estate was complicated due to valuations and accounts required for a number of separate trusts, equalisation formulas and then the need for a lengthy international marketing campaign for the sale of the property. Having considered the particular circumstances of this case, the Commissioner will apply his discretion under subsection 152-80(3) of the ITAA 1997 and allow an extension to the two year time limit.