CGT: small business concessions - active asset test - deceased estate - period of ownership

If a beneficiary of a deceased estate is taken to have acquired an asset on the day the deceased died under subsection 128-15(2) of the Income Tax Assessment Act 1997 (ITAA 1997), what is the period during which the asset must be an active asset of the beneficiary in order to satisfy section 152-35 of the ITAA 1997?

If a beneficiary of a deceased estate is taken to have acquired an asset on the day the deceased died under subsection 128-15(2) of the ITAA 1997 the period, during at least half of, which the asset must be an active asset of the beneficiary in order to satisfy section 152-35 of the ITAA 1997, begins on the day the beneficiary actually acquired the asset (assuming the beneficiary did not own the asset for more than 15 years).

The taxpayer was a beneficiary of their deceased spouse's estate. Under the terms of the will the farming property previously owned by the deceased was held in trust for the taxpayer and their children until the youngest child turned 25 years of age. Several years later, when the youngest child turned 25 years of age, the property passed to the taxpayer and the children. Soon after, the property was transferred to the taxpayer and children.

Two months after the transfer of the property the taxpayer sold their 25% interest in the property and made a capital gain. The taxpayer now wishes to apply the small business capital gains tax (CGT) concessions to reduce the capital gain.

The taxpayer carried on a farming business on the property at all times from the date of their spouse's death until the sale of their interest in the property.

One of the conditions that must be satisfied for the small business CGT concessions to apply is the active asset test in section 152-35 of the ITAA 1997.

Generally, a CGT asset satisfies the active asset test if the asset was an active asset of the taxpayer and for at least half of the period beginning when the taxpayer acquired the asset and ending just before the CGT event. There are modified rules if the taxpayer's business ceased before the CGT event happens or the asset was owned for more than 15 years.

In the case where a CGT asset a person owned just before dying passes to a beneficiary in their estate, the beneficiary is taken to have acquired the asset on the day the person died (subsection 128-15(2) of the ITAA 1997).

In such a case, the question arises as to what is the relevant period during which the asset must be an active asset of the beneficiary in order for the beneficiary to satisfy section 152-35 of the ITAA 1997. In particular, does the word 'acquired' in paragraph 152-35(2)(a) of the ITAA 1997 refer to the earlier deemed acquisition as at the date of death or to when the asset was actually acquired by the beneficiary.

Subsections 152-35(1) and (2) of the ITAA 1997 between them operate to determine the period during which an asset must be an active asset in order to satisfy the active asset test. If the asset has been owned for more than 15 years paragraph 152-35(1)(b) applies. If not, subparagraph (a) applies

The meaning of the word 'acquired', in its paragraph 152-35(2)(a) of the ITAA 1997 context, should therefore be determined by reference to the interrelationship between subsections 152-35(1) and (2) and in particular by reference to the word 'owned' in paragraphs 152-35(1)(a) and (b) and to the nature of the active asset test itself, which considers (in general) how an asset is used. This suggests that the period of actual ownership, rather than a period commencing at a deemed acquisition, is the relevant period.

It can also be noted that the active asset test contained within the former small business concessions did not refer to the word 'acquired' but only the word 'owned' (former subsection 123-65(1) of the ITAA 1997, former subparagraph 160ZZPQ(1)(c)(ii) of the Income Tax Assessment Act 1936 ).

Having regard to these factors it is considered that the word 'acquired', in its subparagraph 152-35(2)(a) of the ITAA 1997 context, means actually acquired and that the relevant period should therefore start from the time of actual acquisition.

In this case, the taxpayer acquired their interest in the property when it was transferred to them two months before the sale. Their interest must therefore be an active asset for at least half of this two month period. As the taxpayer owned it and used it in the course of carrying on a business (subparagraph 152-40(1)(a)(i) of the ITAA 1997) for the whole of this two month period the taxpayer's interest in the property satisfies the active asset test in subparagraph 152-35(1)(a) of the ITAA 1997.

The small business CGT concessions may therefore apply if the other conditions in Division 152 of the ITAA 1997 are satisfied.