Private ruling: Capital gains tax small business retirement exemption - choice by executor
Date of advice: 21 September 2017
Published: February 2018
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Can the executor, when preparing the outstanding income tax return of the deceased, make a choice to disregard under section 152-305 of the Income Tax Assessment Act 1997 (ITAA 1997) all or part of a capital gain made by the deceased before their death? | A1: Yes

Relevant facts and circumstances: The deceased died when they were under 55 years of age. The deceased was a sole trader who sold their business during the 2017 financial year. The deceased satisfied the basic conditions to qualify for the small business concessions. The deceased had discussed their intention to apply the CGT small business retirement exemption with their accountant, including the requirement to make a contribution to their complying self-managed superannuation fund as they were under the age of 55 at the time of the CGT event. The election was not made in writing at that time.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 section 254 | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 subsection 103-25(1) | Income Tax Assessment Act 1997 section 152-305 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: The executor is able to make the choice to apply the CGT small business retirement exemption on behalf of the deceased. As the deceased was less than 55 years of age at the time of the CGT event, the executor will also be required to make a contribution to the deceased’s complying superannuation fund. | Detailed Reasoning - Detailed reasoning: To qualify for the small business CGT concessions, you must first satisfy the ‘basic conditions’ contained in Subdivision 152-A of the ITAA 1997. You must first satisfy one of the following: ● you are a small business entity ● you do not carry on business (other than as a partner) but your 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) ● you are a partner in a partnership that is a small business entity, and the CGT asset is ● an interest in a partnership asset (partnership assets), or ● an asset you own that is not an interest in a partnership asset (partner’s assets) ● you satisfy the maximum net asset value test. In your case, you have provided that the deceased satisfied the basic conditions. Retirement exemption If you are an individual, you can choose to disregard all or part of a capital gain if: ● you satisfy the basic conditions ● you keep a written record of the amount you chose to disregard (the CGT exempt amount), and ● if you are under 55 years old just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account (RSA). If you are 55 years old or older when you make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or RSA. The amount of the capital gain that you choose to disregard (that is, the CGT exempt amount) must not exceed your CGT retirement exemption limit. An individual’s lifetime CGT retirement exemption limit is $500,000 reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption. This includes amounts disregarded under former (repealed) retirement exemption provisions. The choice must have been made by the day the individual’s income tax return for the income year in which the relevant CGT event happened was lodged, or within a further time allowed by the Commissioner (subsection 103-25(1) of the ITAA 1997). ATO Interpretive Decision ATO ID 2012/39 provides guidance on whether the executor of a deceased estate is able to make the choice to apply the CGT small business retirement exemption on behalf of the deceased, when preparing the deceased’s outstanding income tax return. On the death of a taxpayer, an executor, in effect, steps into the shoes of the deceased and winds up the deceased’s personal affairs (Taxation Ruling IT 2622, paragraph 2). An executor is treated as a trustee for income tax purposes (subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), section 995-1 of the ITAA 1997). There are various provisions in the tax law that provide for or require a trustee to be answerable as taxpayer for the doing of all necessary things under the law and, in the case of the estate of a deceased person, make returns that are the same (as far as practicable) as the deceased would have made (section 254 of the ITAA 1936). As such, it is accepted that the executor of a deceased estate, when preparing outstanding income tax returns of the deceased, can make a choice to disregard under section 152-305 of the ITAA 1997 all or part of the capital gain made by the deceased before their death. In your case, you have provided that the deceased satisfied the basic conditions required to apply the CGT small business concessions, specifically the retirement exemption. As the deceased died prior to the lodgement of their income tax return for the 2016-17 income year, the year in which the business was sold and the CGT event occurred, the executor will step into the deceased’s shoes to finalise the deceased’s affairs. The executor will be able to make the choice to apply the CGT small business retirement exemption on behalf of the deceased. As the deceased was less than 55 years of age at the time of the CGT event, the executor will also be required to make a contribution to the deceased’s complying superannuation fund and keep a written record of the amount disregarded, to fully meet the conditions of the CGT small business retirement exemption.