Private ruling: Capital gains tax - deceased estate - small business concession
Date of advice: 8 February 2018
Published: June 2018
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

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 after 20 September 1985. The deceased’s spouse had passed away a number of years earlier. The deceased’s spouse acquired farm land prior to 20 September 1985 (Property 1). The deceased and their spouse acquired more farm land prior to 20 September 1985 (Property 2). The deceased and their spouse resided at Property 1. The deceased’s spouse died intestate. The deceased’s spouses’ ownership interest in Property 1 passed to the deceased. The deceased and their spouse conducted a primary production business on Property 1 and Property 2 (the joint properties). The deceased would have been eligible to claim the small business CGT concessions in relation to Property 1 if they had sold it immediately prior to their death. Probate was granted in the same year the deceased passed away. The executors of the deceased’s estate (the Executors) appointed a real estate agent to sell the joint properties a shortly after probate was granted. More than 12 months later, a purchaser expressed interest in the joint properties and a sale amount was agreed to subject to a suitable contract of sale and due diligence. The due diligence being undertaken by the purchaser became protracted and extensions were sought by the purchaser. The executors terminated the contract after a number of months and instructed the real estate to put the properties back on the market. After a number of months, the Executors appointed a new real estate agent to market and sell the joint properties. A new purchaser indicated interest in the joint properties the following year and a contract was subsequently entered into a short time later. The properties are located in a growth area of a capital city and achieving a sale to a potential developer proved difficult. The Executors have continued to operate the primary production business and will do so until settlement.

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

Reasons for decision: Summary: A CGT asset passes to a beneficiary in the estate of a deceased person if the beneficiary becomes the owner of the asset under the will of the deceased person or in one of the other ways outlined in section 128- 20 of the ITAA 1997. It is considered that a CGT asset passes to a beneficiary of a deceased estate when the beneficiary becomes absolutely entitled to the asset as against the estate's trustee. Because the administration of the estate in this case is complete, the executor is now acting in the capacity of trustee. The beneficiary is absolutely entitled to the assets of the business as against the trustee, because the beneficiary has a vested, indefeasible and absolute interest in each asset and is able to direct how each asset be dealt with. Therefore, the assets of the deceased's business have passed to the beneficiary which means that anything done by the trustee, including the carrying on of the business and its sale, is taken to have been done by the beneficiary. Accordingly any capital gain made on the sale of the business will be taken to have been made by the beneficiary, the beneficiary is entitled to choose the small business retirement exemption in Subdivision 152-D of the ITAA 1997 in respect of the gain, provided the other conditions for the exemption are satisfied. 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, ● 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 ● 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) of the ITAA 1997. 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. In this case, we consider that a reasonable explanation for the delay in the disposal of Property 1 has been provided. We consider that continuing efforts were made to dispose of Property 1. We do not consider that allowing this request would cause the unsettling of others or that there is any mischief involved. Accordingly, the Commissioner will exercise his discretion in relation to the sale of Property 1 under subsection 152-80(3) of the ITAA 1997 to extend the two year period. | Detailed Reasoning - Note.: Pre-CGT interest in Property 2 The interest in Property 2 that was acquired by the deceased prior to 20 September 1985 would not have satisfied the basic conditions for the small business concessions. This is because if the deceased had disposed of this interest just prior to their death the sale would not have resulted in any capital gain. Therefore the Executors are unable to apply the small business concessions to any capital gain made on the disposal of this interest. Note that under Division 128 of the ITAA 1997 the cost base of the pre-CGT interest in the hands of the Executors will be the market value of the property on the deceased’s date of death.