Private ruling: Small business CGT concessions
Date of advice: 6 May 2021
Published: July 2021
Ruling period: Year ending 30 June 2021 | Year ending 30 June 2022
Date scheme commenced: 1 July 2020

Ruling: Q1: Does section 152-80 of the Income Tax Assessment Act 1997 entitle the Trustee for an Estate to disregard the capital gain made from the disposal of shares, if the CGT event happened within two years of the date of the individual's death? | A1: Yes.

Relevant facts and circumstances: A deceased individual was a 50% shareholder in a company, with the remaining 50% of shares held by the spouse. The shares are currently valued at less than $6m. The company was incorporated in 198X, with the deceased being a shareholder since that time. The company acquired land in 198X. From 198X until 200X, the company carried on a business on the property. In 200X, the business was transferred to another company. The property is currently leased. The deceased died in over the age of 55. The Trustee will dispose of the shares within two years of the date of death and distribute the proceeds to the beneficiaries. In response to an information request, the applicant has made the following statements: • prior to the business being transferred, the 80% test in subsection 152-40(3) was passed for all income years where the CGT asset is the shares • the deceased did not have interests in any company, trust or partnership • the total net value of CGT assets owned by the deceased does not exceed the $6 million threshold of the maximum net asset value test • more than 80% of the underlying assets of the company, by market value, were continuously held and used in the course of carrying on a business for a period exceeding 15 years thus satisfying the Active Asset Test • the deceased is a CGT concession stakeholder by holding 50% of the shares, she satisfies the meaning of a significant individual conveyed in section 152-55

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Subdivision 152-B | Income Tax Assessment Act 1997 Subsection 152-10(1) | Income Tax Assessment Act 1997 Paragraph 152-10(1)(a) | Income Tax Assessment Act 1997 Paragraph 152-10(1)(b) | Income Tax Assessment Act 1997 Paragraph 152-10(1)(c)(ii) | Income Tax Assessment Act 1997 Paragraph 152-10(1)(d) | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Subsection 152-35(1) | Income Tax Assessment Act 1997 Subsection 152-35(1)(b) | Income Tax Assessment Act 1997 Section 152-35(2) | Income Tax Assessment Act 1997 Paragraph 152-40(1)(a) | Income Tax Assessment Act 1997 Subsection 152-40(3) | Income Tax Assessment Act 1997 Paragraph 152-40(3)(b) | Income Tax Assessment Act 1997 Section 152-55 | Income Tax Assessment Act 1997 Section 152-65 | Income Tax Assessment Act 1997 Subsection 152-70(1) | Income Tax Assessment Act 1997 Section 152-80 | Income Tax Assessment Act 1997 Subparagraph 152-80(1)(a)(i) | Income Tax Assessment Act 1997 Subparagraph 152-80(1)(b)(i) | Income Tax Assessment Act 1997 Paragraph 152-80(1)(c) | Income Tax Assessment Act 1997 Paragraph 152-80(1)(d) | Income Tax Assessment Act 1997 Paragraph 152-80(2)(a) | Income Tax Assessment Act 1997 Paragraph 152-80(2A)(b) | Income Tax Assessment Act 1997 Section 152-105 | Income Tax Assessment Act 1997 Paragraph 152-105(a) | Income Tax Assessment Act 1997 Paragraph 152-105(b) | Income Tax Assessment Act 1997 Paragraph 152-105(c) | Income Tax Assessment Act 1997 Paragraph 152-105(d) | Income Tax Assessment Act 1997 Subparagraph 152-105(d)(i)

Reasons for decision: Summary: All the requirements in section 152-80 will be satisfied. The Trustee of an Estate is entitled to disregard the capital gain made if the shares are disposed within two years of the date of the individual's death. | Detailed Reasoning - Detailed reasoning: Section 152-80 allows the legal personal representative of a deceased individual to apply the small business CGT concessions in respect of the sale of the deceased's CGT assets where the following are satisfied: • the CGT asset forms part of the estate of the deceased individual [1] • the CGT asset devolves to the legal personal representative of the deceased individual [2] • the deceased would have been entitled to reduce or disregard a capital gain under Division 152 if a CGT event had happened in relation to the CGT asset immediately before his or her death, [3] and • a CGT event happens in relation to the CGT asset within two years of the individual's death. [4] | Detailed Reasoning - The CGT asset forms part of the estate of the deceased individual: The deceased held 50% of the shares at the time of death. Shares are specifically included in the definition of a CGT asset. [5] These shares form part of the Estate and therefore this condition is satisfied | Detailed Reasoning - The CGT asset devolves to the legal personal representative of the deceased individual: A legal personal representative is defined to include an executor or trustee of a deceased estate. [6] The shares devolves to the Trustee and therefore this condition is satisfied. | Detailed Reasoning - A CGT event happens in relation to the CGT asset within two years of the individual's death: If the Trustee disposes of the shares within two years of the date of the individual's death, the Trustee will satisfy this condition. | Detailed Reasoning - Eligibility for small business concessions: Paragraph 152-80(1)(c) requires an examination of the extent to which the deceased would have been able to apply the CGT small business concessions if a CGT event happened in relation to the shares immediately before death. Division 152 provides CGT concessions that allow eligible taxpayers to disregard or defer some or all of a capital gain arising from the disposal of an active asset used in a small business, provided certain conditions (the basic conditions) are met. Subsection 152-10(1) sets out the basic conditions to be satisfied before a taxpayer can access the CGT concessions. Subsection 152-10(1) states: A *capital gain (except a capital gain from *CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain: (a) a *CGT event happens in relation to a *CGT asset of yours in an income year; (b) the event would (apart from this Division) have resulted in the gain; (c) at least one of the following applies: (i) you are a *CGT small business entity for the income year; (ii) you satisfy the maximum net asset value test; (iii) you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership; (iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year; (d) the CGT asset satisfies the active asset test (see section 152-35). Since section 152-80 examines what happens if a CGT event had happened in relation to an individual's CGT asset immediately before his or her death, the condition in paragraph 152-10(1)(a) is satisfied. The second condition in paragraph 152-10(1)(b) is satisfied, as a capital gain would have been made if a CGT event happened at that time. In relation to the third condition in paragraph 152-10(1)(c) the applicant has stated the deceased had no connected or affiliated entities and the total net value of CGT assets owned did not exceed the $6 million threshold of the maximum net asset value test in section 152-15. Based on these statements, the third condition in subparagraph 152-10(1)(c)(ii) is satisfied. The final condition in paragraph 152-10(1)(d) requires the CGT asset to satisfy the active asset test in section 152-35. Subsection 152-35(1) relevantly states: A CGT asset satisfies the active asset test if: (b) 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 7½ years during the period specified in subsection (2). Subsection 152-35(2) states the period begins when you acquired the asset and ends the earlier of when the CGT event happens, or the relevant business ceased. As the deceased owned the shares from 198X until death in 201X, the shares were owned for more than 15 years. To satisfy the active asset test, the shares must also have been an active asset of the deceased for at least 7½ years between 198X and when the CGT event happens for the purposes of subsection 152-80(1)(c). The company conducted a business on the property from 198X until 200X. A CGT asset is an active asset if your own the asset and it is used, or held ready for use, in the course of carrying on a business. [7] However, as the relevant CGT asset are shares, an examination of the meaning of an active asset in subsection 152-40(3) needs to be undertaken, which states: A *CGT asset is also an active asset at a given time if, at that time, you own it and: (a) it is either a *share in a company that is an Australian resident at that time or an interest in a trust that is a *resident trust for CGT purposes for the income year in which that time occurs; and (b) the total of: (i) the *market values of the active assets of the company or trust; and (ii) the market value of any financial instruments of the company or trust that are inherently connected with a business that the company or trust carries on; and (iii) any cash of the company or trust that is inherently connected with such a business; is 80% or more of the market value of all of the assets of the company or trust. The applicant has stated that for the entire period the company conducted its business, the 80% test in paragraph 152-40(3)(b) was met. As the company is an Australian resident and the shares held by the deceased are considered active assets for the period 198X to 200X, the shares held by the deceased are considered to be active assets under subsection 152-40(3). The deceased held the shares for over 15 years and during that period the shares were active assets for over 15 years. Therefore, as the deceased held the shares for more than 15 years and the shares were active assets for at least 7½ years during that period, the shares will satisfy the active asset test in paragraph 152-10(1)(d). The deceased will therefore satisfy all the basic conditions in subsection 152-10(1) immediately before death. | Detailed Reasoning - Small business 15-year exemption: There are four small business concessions available. The Trustee is seeking to apply the small business 15-year exemption in Subdivision 152-B, which takes priority over the other small business concessions. If the small business 15-year exemption applies, the entire capital gain is disregarded so there is no need to apply any further concessions. Section 152-105 states: If you are an individual, you can disregard a *capital gain arising from a *CGT event if all of the following conditions are satisfied: (a) the basic conditions in Subdivision 152-A are satisfied for the gain; (b) you continuously owned the *CGT asset for the 15-year period ending just before the CGT event; (c) if the CGT asset is a *share in a company or an interest in a trust - the company or trust had a *significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset; (d) either: (i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or (ii) you are permanently incapacitated at the time of the CGT event. As discussed above, the basic conditions in subsection 152-10(1) are satisfied, thus the first condition in paragraph 152-105(a) is satisfied. The deceased owned the shares for over 15 years. Therefore, the second condition in paragraph 152-105(b) is satisfied. The third condition in paragraph 152-102(c) requires the company to have a significant individual for a total of at least 15 years whilst the deceased owned the shares. Section 152-55 sets out that an individual is a significant individual in a company at a time if, at that time, the individual has a small business participation percentage in the company of at least 20%. The small business participation percentage for an individual can be either direct or indirect according to section 152-65. Table item 1 in subsection 152-70(1) explains that an individual's direct small business participation percentage in a company is the percentage that the entity has because of holding the legal and equitable interests in shares in the company. Since incorporation, and until the date of death, the company only had two shareholders, with each shareholder holding 50% of the shares. This means that the company had a significant individual for a total of at least 15 years. Therefore, the third condition in paragraph 152-105(c) is satisfied. At the time of death, the deceased was aged over 55. The fourth and final condition in subparagraph 152-105(d)(i) requires the CGT event to happen in connection with retirement. However, this condition is modified by paragraphs 152-80(2)(a) and 152-80(2A)(a) which allows the legal personal representative of the deceased individual to reduce or disregard a capital gain in the same way as the deceased individual would have been entitled to as if: paragraph 152-105(d) only required the deceased individual to have been 55 or over, or permanently incapacitated, at the time of the *CGT event referred to in paragraph (1)(c) of this section In other words, there is no requirement that a CGT event happened in connection with retirement, only that the deceased be aged 55 or over at the time of death. Therefore, the fourth and final condition in paragraph 152-105(d) is satisfied. The deceased would have satisfied the all requirements in section 152-105 immediately before death and would have been able to apply the small business 15-year exemption to disregard the capital gain if a CGT event had happened immediately before death. The requirements of subsection 152-80(1) have been satisfied. The Trustee will be entitled to disregard any capital gain made from disposing of the shares devolved from the Estate, if these shares are disposed of within two years of the date of the individual's death. [1] Subparagraph 152-80(1)(a)(i) [2] Subparagraph 152-80(1)(b)(i) [3] Paragraph 152-80(1)(c) [4] Paragraph 152-80(1)(d) [5] Note 1 in section 108-5 [6] Subsection 995-1(1) [7] Paragraph 152-40(1)(a)

Reasons for decision: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise noted. | Question: Does section 152-80 entitle the Trustee of an Estate to disregard the capital gain made from the disposal of shares, if the CGT event happens within two years of the date of the individual's death?