Private ruling: deceased estate and extension of time to access capital gains tax small business concessions
Published: September 2013
Ruling period: Period ending 30 June 2014
Date scheme commenced: 1 July 2007

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend your time limit to access the capital gains tax (CGT) concessions for small business, on the disposal of the 'A' property, until 31 October 2013? | A1: No | Q2: If so, will you be eligible to apply the 15-year exemption concession to any capital gain made on the disposal of the 'A' property? | A2: 

Relevant facts and circumstances: The deceased, Z, acquired an equitable interest in the property known as 'A' in the early 90's, pursuant to a bequest under the Will of Z's parent. Z became the registered proprietor of a 25% interest in the property known as 'B' prior to 20 September 1985. Z died in late 200X. Probate was granted in early 200Y, in respect of a Z's Will. The Will provided that all of Z's estate is to be held on trust by his Executors and that all income derived from investing the estate assets is to be applied to the prescribed beneficiaries at the discretion of the executors/trustees. The trust is continuing and will terminate on the death of X (Z's spouse). 'A' was sold by the legal personal representative of Z by contract of sale in late 20XX. 'B' was sold by the legal personal representative of Z by contract of sale in late 20XX. The beneficiaries of the Estate of Z signed a Deed of Family Arrangement in late 20YY which altered the manner in which Z's residuary estate is to be divided following the death of X. X was alive at the time both the 'A' and 'B' properties were sold and is still alive. Upon termination of the Life Trust and following amendments made in the Deed of Family Arrangement, the balance of the residuary estate is to be applied to the creation of three new trusts, to be known as; · 'R Trust' which is to receive 50% of the balance of the residuary estate · 'S Trust' which is to receive 25% of the balance of the residuary estate · 'T Trust' which is to receive 25% of the balance of the residuary estate Since the death of Z in 200X, both 'A' and 'B' properties have been used by a partnership comprising the Estate of Z, X, E and F, in carrying on a business. You state that the Estate satisfies the eligibility criteria for a small business in that its total assets do not exceed $6 million and its turnover does not exceed $2 million. The properties were sold during the administration of the Estate of Z and prior to the establishment of 'R Trust', 'S Trust' and 'T Trust'. You have stated that the legal personal representatives of the Estate were not able to finalise the administration of the Estate within two years of the date of Z's death as Z's affairs were reasonably complex as, at the time of their death, Z and X were in a partnership with E and F (family members). You have stated that part of the property was also being utilised by a third party and these arrangements could not be easily terminated and any sale of the property had to await the conclusion of these arrangements. Under the terms of Z's Will, a trust under the ultimate control of E was to inherit the whole of Z's estate upon the death of X, subject to the payment by the trustees of that trust of a sum of money to each of Z's children, S and T. This was the matter of dispute between and amongst the family as that trust was to receive considerably more from the Estate than S and T. You state that whilst no formal challenge to the Will was lodged by S and T, this was only a result of E agreeing to alter the terms of the administration of Z's Will. Negotiations in this regard were extensive and protracted. You state that Z's parent, M, promised them, during their lifetime, that 'A' would be bequeathed to Z. You state that this promise was well known by all family members, including Z's siblings. 'A' was bequeathed to Z pursuant to the Will of M. M's Will was made in the 19xx's, with one half of the property bequeathed to Z and one quarter each to Z's siblings, subject to a life interest in favour of M's spouse. M later made a codicil to his Will, directing that the entire residuary estate be bequeathed to Z, subject to a life interest in favour of M's spouse. You state that the codicil evidenced the promises made to Z and the contribution they made to the property and the business during Z's adult life. You state that Z's entitlement to 'A' was not challenged by their siblings. You state that, if asked to do so, a court would have found that Z was the beneficiary of a constructive trust in respect of 'A' and that such a trust was created more than two years prior to M's death. However, the court was not asked to rule on this matter as M's Will reflected the promises made.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 128 | Income Tax Assessment Act 1997 Section 128-15 | Income Tax Assessment Act 1997 Section 128-50 | Income Tax Assessment Act 1997 Section 152-80

Reasons for decision: Detailed Reasoning - Effect of death: The capital gains tax provisions that deal with the effect of death are located in Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997). When a person dies, their assets devolve (are transferred) to their legal personal representative (LPR) or are acquired by a surviving joint tenant, where the deceased owned those assets as joint tenant with another person. In effect, there is a change of ownership of the assets and, therefore, a CGT event (being a disposal) happens. However, any capital gain or capital loss from this CGT event is disregarded, as is any capital gain or loss that: · the LPR makes when the asset passes to a beneficiary in the estate, or · that is made as a result of the asset being acquired by a surviving joint tenant. Subsection 128-15(2) of the ITAA 1997 explain that if a CGT asset you owned just before dying devolves to your legal representative or passes to a beneficiary in your estate, the legal personal representative, or beneficiary, is taken to have acquired the asset on the day you died. This is also the case when the asset is acquired by a surviving joint tenant (subsection 128-50(2) of the ITAA 1997). Subsection 128-15(4) of the ITAA 1997 explains modifications to the cost base of CGT assets for LPR's or beneficiaries of deceased estates. It provides that if the deceased person acquired their asset on or after 20 September 1985, the first element of your cost base and reduced cost base is taken to be the deceased person's cost base and reduced cost base of the asset on the day the person died. However, if the deceased person acquired their asset prior to 20 September 1985, the first element of your cost base and reduced cost base is taken to be the market value of the asset on the day the person died. | Detailed Reasoning - Death and the small business CGT concessions: Section 152-80 of the ITAA 1997 provides that the legal personal representative (LPR) or beneficiary of the deceased estate will be eligible for the small business CGT concessions where: · the asset is disposed of within two years of the date of death (although the Commissioner may allow a longer period by granting an extension of time), and · the asset would have qualified for the small business CGT concessions if the deceased had disposed of the asset immediately before his or her death. Provided these conditions are satisfied, the CGT small concessions are also available to the trustee of a trust established by the will of the deceased, a beneficiary of such a trust, and a surviving joint tenant. | Detailed Reasoning - Death and the 15-year exemption: The small business 15-year exemption takes priority over the other small business concessions and the CGT discount. If the small business 15-year exemption applies, you entirely disregard the capital gain so there is no need to apply any further concessions. Further, you do not reduce the capital gain by any capital losses before you apply the 15-year exemption concession. Subsection 152-105 of the ITAA 1997 provides that an individual can entirely disregard any capital gain if all of the following conditions are satisfied: (a) you satisfy the basic conditions (b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event (c) you are either: i. 55 or over at the time of the CGT event and the event happens in connection with your retirement; or ii. permanently incapacitated at the time of the CGT event. You will be eligible for the 15-year exemption to the same extent that the deceased would have been just prior to their death, except that: · the CGT event does not need to be in connection with the retirement of the deceased · the deceased needs to have been 55 or older immediately before their death, rather than at the time of the CGT event. Again, in order to access the 15-year exemption, the asset must be disposed of within two years of the date of death (although the Commissioner may allow a longer period by granting an extension of time). | Detailed Reasoning - Commissioner's discretion: The Commissioner may exercise his discretion to allow an extension of time under subsection 152-80(3) of the ITAA 1997 in situations such as where: · there is a significant delay in obtaining probate · the will is contested or challenged; · the complexity of a deceased estate delays the completion of administration of the estate; · a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury); or · settlement of a contract of sale is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control. In exercising his discretion, the Commissioner would also consider the following factors: · there should be evidence of an acceptable explanation for the delay, and that it would be fair and equitable in the circumstances to provide such an extension; · account must be had to any prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension; · account must be had of any unsettling of people, other than the Commissioner, or of established practices; · there must be a consideration of fairness between the taxpayer and other people in like positions and the wider public interest; · whether there was any mischief involved; and · a consideration of the consequences. In your case, the date of Z's death is noted as late 200X. Therefore, the two year period in which to dispose of a CGT asset and still be able to access the CGT concessions for small business would end in late 200Y. Ordinarily, based on you assertions regarding the complexity of the deceased's affairs, the application of the above factors to your circumstances, and the fact the probate was not granted until early 200Y (some 17 months after the deceased's death), there would be scope for the Commissioner to exercise his discretion to allow further time to dispose of the CGT asset and still access the small business concessions. For example, in this instance it may be arguable or reasonable to extend the time frame to 2 years from the date probate was granted, being 2 April 200W. However, having considered the relevant factors against your circumstances, in particular, the fact that; · the will was not formally contested or challenged in the courts · the dispute amongst family members was in regards to the distribution of the residuary of the Estate once Z's spouse, X, had died, and was not in relation to any 'passing' of the property in question to a beneficiary (notably there is no specific asset that is bequeathed to any entity). · the Deed of Family Arrangement was signed in late 20yy, some 12 months after the 'A' and 'B' properties were sold by the Estate, indicating that the family negotiations in regards to the Estate did not delay the disposal of the property, and · the agreement to cease the business arrangement entered into with the third party who utilised part of the property was not finalised until late 20xx, some 5 years after the death of the deceased. we consider that the delay in disposing of the 'A' property, beyond that of late 200B, was not entirely caused by factors outside of the relevant parties' control. Accordingly, the Commissioner will not exercise the discretion under subsection 152-80(3) of the ITAA 1997 to allow an extension of your time limit to access the CGT small business concessions until 31 October 2013. Consequently, as an extension of time to access the small business concessions has not been allowed, you will not be able to access the 15-year exemption concession. | Detailed Reasoning - Disposal of asset after two-year time limit: If a person carrying on a business dies and their assets devolve to their LPR, beneficiary, surviving joint tenant or trustee or beneficiary of a testamentary trust (the transferee), the active asset test is applied to the transferee in relation to any capital gain made on a sale of the assets after the two-year time limit (or such further time that the Commissioner allows). This means that if the transferee does not continue to carry on the deceased's business, or use the asset in another business, after the two-year time limit, the active asset test may not be satisfied and the small business concessions may not be available.