Private ruling: Capital gains tax - small business concessions - 15-year exemption
Date of advice: 16 March 2017
Published: August 2017
Ruling period: Income year ending 30 June 20YY.
Date scheme commenced: 1 July 20XX.

Ruling: Q1: Are you eligible for the capital gains tax small business 15-year exemption in relation to the disposal of the property in the 20XX-YY income year under Subdivision 152-B of the Income Tax Assessment Act 1997 ? | A1: Yes.

Relevant facts and circumstances: Person A was the sole owner of the property (the Property). A small area of the Property was used in relation to horticultural activities with the remaining area being used in relation to animal related activities. Prior to Person A's passing, the Property had been run as a business enterprise by Person A, their spouse (Person B) and their child (Person C) with all of them deriving their income from the farming business. While Person A solely owned the Property, the business enterprise was conducted as a joint exercise. After 20 September 1985, Person A passed away. Following Person A's passing, the Property was operated on a “business as usual” basis for around two years with Person B and Person C continuing to derive their income from the farming operations which were conducted by Person C in consultation with Person B. Person B and Person C decided to sell the animals and some of the Property and around two years after Person A passed away as Person C was more interested in the horticultural activities. The animals were sold and part of the Property that had been used for grazing purposes were also sold. Following the sale of the animals the Property was used solely in relation to the horticultural activities. Around two years after Person A passed away, Person B moved off the Property into a nearby town and their extended family had made use of the house on the Property as accommodation over the following years. A number of years after Person A had passed away the title of the Property was transferred to Person A. A number of years after the title had been transferred to Person B, Person B leased the Property to Person C under an informal family arrangement with no formal lease agreement being entered into. Person C undertook the management decisions in relation to the Property in conjunction with Person B. Person C expanded the scope of the horticultural activities on the Property during the time they ran those operations on the Property and had contracted out some of the vineyard activities due to having a full-time job away from the Property. Person C continued the horticultural activities on the Property until they retired due to ill health and their child (Person D) commenced running the horticulture operations. Prior to Person D taking over the operations, they had helped out Person C on an “as needed” basis. Person D relied on Person B and Person C for advice and guidance in relation to the horticultural activities undertaken on the Property. Person B (the deceased) passed away over 10 years after they had moved off the Property. Person D ceased the horticultural activities on the Property after the deceased had passed away and the deceased's estate had decided to sell the Property. A contract of sale of the Property was entered into a number of months after the deceased passed away and a capital gain has been made on the sale of the Property. The net value of the assets of you and your affiliates and connected entities is less than $6million at the time the Property was sold. A review of Australian Taxation Office records of the deceased's returns lodged from 1999-00 to the 2008-09 income years shows that various amounts of gross rental income amounts were returned.

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

Reasons for decision: Summary: Summary You have met the basic conditions for the capital gains tax (CGT) small business 15-year exemption to apply. The additional conditions for the 15-year exemption to apply to deceased estates have also been met because the Property was sold within two years of the deceased's date of death and they were over 55 years of age when she passed away. Therefore, you will be eligible to apply the 15-year exemption to the capital gain made on the sale of the Property. Detailed reasoning | Detailed Reasoning - Deceased estates: Where an asset forms part of the estate of a deceased individual, section 152-80 of the ITAA 1997 provides that where the deceased individual would have been entitled to access the small business CGT concessions immediately before his or her death, then the trustee of the deceased estate will be eligible to access the concessions if a CGT event happens in relation to the CGT asset within two years of the individual's death. Under Division 152 of the ITAA 1997 four different CGT concessions may be accessed if the basic conditions in Subdivision 152-A are satisfied. These are the: (a) 15-year exemption; (b) 50% active asset reduction; (c) retirement exemption; and (d) small business rollover. In determining whether the deceased would have been entitled to the 15-year exemption, where deceased was not permanently incapacitated immediately prior to death, the deceased is only required to have been over 55 years of age or over and the disposal of the asset is not required to have happened in connection with retirement. Application to your situation In this case, the Property was disposed of within two years of the date of the deceased passing away and they were over 55 years of age when they passed away. Therefore, you have met the conditions for you to be able to access the 15-year exemption if the deceased meets the basic conditions contained in subdivision 152A of the ITAA 1997 immediately prior to their death. We have considered the basic conditions and how they apply to your situation below: | Detailed Reasoning - Basic conditions: To qualify for the CGT small business concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. A capital gain that you make may be reduced or disregarded under section 152-10 of the ITAA 1997 if the following basic conditions are satisfied: (a) A CGT event happens in relation to a CGT asset of yours in an income year; (b) The event would have resulted in a gain; (c) The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997; and (d) 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; ● 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; ● 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 (passively held assets as outlined in subsection 152-10(1A) of the ITAA 1997). Application to your situation We have reviewed the facts of your situation and have determined that the basic conditions to be eligible to the 15-year exemption have been met for the following reasons: ● the Property was owned by the deceased for more than 15 years; ● the Property has been sold within two years of the deceased's date of death and a capital gain has been made on the sale; ● the deceased, Person C and Person D had acted in concert with each other in relation to the farming activities due to their close family relationship; ● there was a family arrangement in relation to the farming operations and the Property had been leased without any formal agreement; ● the Property was used in relation to horticultural business operations carried on by both Person C and Person D which had an aggregated turnover over of less than $2 million; ● Person C had ceased their horticultural business operations in the same income year that the deceased had passed away; ● although the house was rented out on occasions, the Property's main use was not to derive rent and therefore is not excluded from being an active asset; ● the Property was an active asset for more than the 7.5 years required; and ● the net value of the assets of you and your affiliates and connected entities is less than $6million at the time the Property was sold. Therefore, you can disregard the capital gain made on the disposal of the Property.