Private ruling: Capital gains tax - small business concession - deceased estate
Date of advice: 26 October 2017
Published: March 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1986.

Ruling: Q1: Are you eligible to disregard the capital gain made on the sale of the property under the 15 year exemption set out in Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: The deceased passed away. The deceased had been involved in primary production activities for a number of decades. The deceased owned post-CGT farm land (the property). The property was used in the course of carrying on their primary production business since its acquisition. The deceased carried on a business as sole trader with a turnover of less than $2 million. At the time of their death, the deceased was aged over 55. The land was sold by the executor within two years of the deceased’s death.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152.

Reasons for decision: Summary: You are eligible to disregard the capital gain made on the sale of the property under the 15 year exemption set out in Subdivision 152-B of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Death and the small business concessions When a taxpayer acquires a capital gains tax (CGT) asset, including acquisition by inheritance, they are potentially liable for tax on any capital gain on that asset when a CGT event subsequently happens to it. 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 immediately prior to their death, and ● 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. In this case, when the deceased passed away the assets devolved to the legal personal representative, and the property was sold within two years of the deceased death. We must now consider whether the deceased would have been able to apply the small business concessions to the property just prior to his death. Eligibility for the small business concessions The basic conditions for the small business capital gains tax concessions in Subdivision 152-A of the ITAA 1997 as relevant to this case are: ● the small business entity test; and ● the active asset test. Small business entity You will be a small business entity if you are an individual, partnership, company or trust that is carrying on a business and has an aggregated turnover of less than $2 million. In this case, the deceased had a turnover of less than $2 million and will therefore meet the small business entity test. Active asset test The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied if: ● 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 detailed below, or ● 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 7.5 years during the test period. The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases. A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you. In this case, the active asset test would have been satisfied immediately before the deceased’s death. Therefore, the property will satisfy the active asset test. 15 year exemption You can disregard a capital gain from a CGT event happening to a CGT asset you have owned for at least 15 years if you: ● satisfy the basic conditions for the small business CGT concessions, and ● continuously owned the CGT asset for the 15 year period ending just before the CGT event happened. If you are an individual: ● when the CGT event happened ● you were permanently incapacitated, or ● you were 55 years old or older, and the event happened in connection with your retirement. This exemption can be used if the deceased had met the requirements, except that it is not necessary for the CGT event to have happened in relation to the retirement of the individual. Application to your circumstances As discussed above, the property satisfies the active asset test. The deceased continuously owned the property for more than 15 years. Therefore, as the deceased would have been eligible for to apply the 15 year exemption immediately prior to his death, you are eligible to disregard the capital gain made on the sale of the property under the 15 year exemption set out in Subdivision 152-B of the ITAA 1997.

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