1 Can the Estate access the 50% small business active asset reduction under Subdivision 152-C of the Income Tax Assessment Act 1997 (ITAA 1997) and the small business retirement exemption under Subdivision 152-D of the ITAA 1997 in relation to the pre capital gains tax (CGT) interest in the property?
No. Question 2 Will the Commissioner allow an extension of time under subsection 152-80(3) of the ITAA 1997 until November 20XX for the Estate to dispose of the post-CGT interest in the property to enable the Estate to access the 50% small business active asset reduction under Subdivision 152-C of the ITAA 1997 and the small business retirement exemption under Subdivision 152-D of the ITAA 1997? Answer No. Issue 2 Question 1 For the year ended 30 June 20XX, are the beneficiaries considered to be presently entitled to their share of the net income of the trust estate under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936)? Answer Yes. This ruling applies for the following period : Year Ended 30 June 20XX The scheme commenced on: July 20XX
In February 19XX, the deceased, along with their sibling-in-law, acquired the property. They acquired the property as tenants in common. They each obtained X% ownership. The purchase price of the property was $X. The purpose of the purchase was for primary production, cropping and grazing livestock. In November 20XX, the deceased's sibling-in-law passed away. Their sibling-in-law's share of the property was transferred to their children. In July 20XX, the property was valued at $X. On the same date, the deceased acquired the remaining X% of the property from their sibling-in-law's children. The deceased acquired this portion of the property for $X, as this was X% of the property value. As of this date, the deceased was no longer using the property directly for their own primary production, cropping and grazing of livestock and was renting the property out for agistment. It was rented to a non-affiliated and unconnected entity. In March 20XX, the deceased passed away. The relevant business' aggregated turnover at the conclusion of this financial year was less than $X million. The property subsequently became under the control of the Estate and has been rented out under the Estate.
The deceased's Will was a standard Will, where the beneficiaries of the Estate were to receive the monies. None of the beneficiaries are under a legal disability. The beneficiaries have a claim of interest in the income which cannot be defeated by another person. They would be presently entitled to the income even though they have not actually received the income. In November 20XX, the property was sold. The sale price was $X. The property was not sold within X years of the deceased's passing as there were varying views amongst the beneficiaries. These views led to disagreements and time was required for all parties to agree. The Estate has been fully administered. In assuring the Estate has been fully administered, the following steps have been taken: • Grants of representation have been obtained. • The Executor has applied for and was granted probate. • The Executor's legal authority to manage the Estate has been confirmed. • All relevant assets and liabilities have been identified, valued and documented.
• All relevant debts and expenses have been paid off, including funeral costs, outstanding bills and taxes. • A statutory notice to creditors has been published. • The deceased's final tax return has been lodged. The remaining assets have been distributed to the beneficiaries in accordance with Will and intestacy laws.
Income Tax Assessment Act 1936 section 97 Income Tax Assessment Act 1936 section 99 Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 section 152-10 Income Tax Assessment Act 1997 section 152-35 Income Tax Assessment Act 1997 section 152-40 Income Tax Assessment Act 1997 section 152-80 Income Tax Assessment Act 1997 section 152-205 Income Tax Assessment Act 1997 section 152-305 Income Tax Assessment Act 1997 section 152-320
Issue 1 Question 1 Summary If the deceased had disposed of their pre-capital gains tax (CGT) interest in the property immediately before their passing, any capital gain would have been disregarded under paragraph 104-10(5)(a) of the ITAA 1997. Accordingly, the small business CGT concessions would not apply to the pre-CGT interest in the property. Detailed reasoning Section 152-80 of the ITAA 1997 requires an examination of the extent to which the deceased individual would have been able to apply the CGT small business concessions if a CGT event happened in relation to the relevant asset immediately before their passing. As the deceased had 2 separate interests in the property (pre and post CGT), they will be considered separately below. The deceased purchased the property in 19XX with their sibling-in-law, each having a X% ownership interest.
A basic condition for the small business concessions is that the event would (apart from the application of Division 152 of the ITAA 1997) have resulted in a capital gain. If the deceased had disposed of the pre-CGT interest in the property immediately before their passing, any capital gain would have been disregarded under paragraph 104-10(5)(a) of the ITAA 1997. Accordingly, the deceased could not have accessed any of the small business concessions in relation to the pre-CGT interest they held in property. Question 2 Summary
The deceased would have not satisfied all the relevant requirements under section 152-10 of the ITAA 1997 in relation to their post-CGT interest in the property immediately before their passing. The deceased acquired the post-CGT interest in the property in July 20XX. They passed away in March 20XX. In this timeframe, they were renting out the property for agistment and were not using the property while carrying out their own business. The post-CGT interest in the property is not an active asset. Accordingly, the Estate is unable to access the small business CGT concessions and disregard the capital gain made upon the disposal of the post-CGT interest in the property. The Commissioner is unable to exercise their discretion under subsection 152-80(3) of the ITAA 1997 to extend the period to November 20XX because the Estate is not eligible for the small business CGT concessions. Detailed reasoning Deceased's entitlement to small business concessions
Section 152-80 of the ITAA 1997 allows the legal personal representative (LPR) of a deceased individual to apply the small business CGT concessions if the conditions set out in subsection 152-80(1) of the ITAA 1997 are satisfied. These are: • the asset forms part of the estate, • the asset devolves to the individual's LPR, • the deceased would have been entitled to reduce or disregard a capital gain under Division 152 of the ITAA 1997 if a CGT event had happened in relation to the CGT asset immediately before their passing, and • a CGT event happens in relation to the CGT asset within 2 years of the individual's passing. The 2-year time limit prescribed may be extended by the Commissioner in certain circumstances (subsection 152-80(3) of the ITAA 1997). Basic conditions Section 152-10 of the ITAA 1997 contains the basic conditions that must be satisfied to be eligible for the small business CGT concessions (SBC). These conditions are: a) a CGT event happens in relation to a CGT asset in an income year,
b) the event would (apart from the application of Division 152) have resulted in a capital gain, c) at least one of the following applies: i. the entity is a small business entity for the income year, ii. the entity satisfies the maximum net asset value test in section 152-15 of the ITAA 1997, iii. the entity is a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership, or iv. the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year, and d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. If the basic conditions above are satisfied, there are additional requirements to consider for each of the concessions: • 50% active asset reduction - There are no additional conditions. If the basic conditions are satisfied, this concession provides a 50% reduction of the capital gain.
• Retirement exemption - If the entity is over 55 at the time of making a choice to apply the retirement exemption, the only additional requirement is that they maintain a record of the amount they decide to disregard. The amount they decide to disregard must not exceed their CGT retirement exemption limit of $500,000. Active asset test For an asset to satisfy the active asset test as per section 152-35 of the ITAA 1997: a) the entity must have owned the asset for 15 years or less and the asset was an active asset of the entity for a total of at least half of the test period detailed below, or b) the entity must have owned the asset for more than 15 years and the asset was an active asset of the entity for a total of least 7.5 years during the test period. The test period: a) begins when the entity acquires the asset, and b) ends at the earlier of: i. the CGT event, and ii. when the business ceased, if the business in question ceased in the 12 months before the CGT event.
A CGT asset is an active asset at a time if the asset is owned and it is used or held ready for use while an entity is carrying on a business. This business is to be carried on by the entity, their affiliate or another entity that relates to them. Of relevance to this case are the exceptions outlined in subsection 152-40(4) of the ITAA 1997. Paragraph 152-40(4)(e) of the ITAA 1997 specifies a CGT asset is not an active when it is used to derive interest, an annuity, rent, royalties or foreign exchange gains. This is unless: i. it is an intangible asset and has been notably developed, altered or improved so its market value has been notably enhanced, or ii. its use for deriving rent was only temporary. Carrying on a business Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioner's view of the law in relation to the carrying on of a business of primary production. The following indicators from paragraph 13 of TR 97/11 are relevant when considering whether a business is being carried on: • whether the activity has a significant commercial purpose or character,
• whether there is more than just an intention to engage in business, • whether there is a purpose of profit as well as a prospect of profit, • whether there is repetition and regularity to the activity, • whether the activity is of the same kind and carried on in a similar manner to businesses in the industry, • whether the activity is planned, organised and carried on in a business-like manner, • the size, scale and permanency of the activity, and • whether the activity is better described as a hobby or recreation. The ruling states that no one indicator is decisive and all indicators should be considered in combination and as a whole ( Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). Whether a business is being carried on will depend on the large or general impression gained ( Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators and whether those indicators provide the operations with a commercial flavour ( Ferguson v. FC of T
(1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case. Agistment activities 'Agistment' was defined in Sinclair v Judge [1930] St R Qd 220 as '...the act of taking another's stock to graze, pasture or feed on land with an implied agreement to redeliver it to the owner on demand'. Taxation Ruling IT 225 Primary production - agistment income (IT 225) provides the Commissioner's view of the law in relation to whether agistment income is earned through a business of primary of production. The general proposition may be stated that where income arises from the use of the assets of a business of primary production and the particular use is a recognised incident of carrying on that sort of business, the income may be regarded as forming part of the proceeds of the business. That is, income earned from activities that are incidental to the running of a primary production business is a part of the business.
Paragraph 4 of IT 225 sets out that the general proposition does not extend to a situation where property or a substantial part of a property is used solely for agistment. The agistment income would be considered separate from the business income earned. The question of whether agistment activities amount to carrying on a business was discussed in the Administrative Appeals Tribunal decision of Case 47/95 95 ATC 404 ( Case 47/95 ), in which Associate Professor Fayle stated: Agisting another's livestock does not ordinarily constitute the carrying on of a business. Agistment fees ordinarily are in the nature of rent. However, where the land owner is charged with management, maintenance and care of the animals agisted then it is possible that the person is carrying on a business, the reward for which is the agistment fee. This is more likely if the level of the agistment fee depended on the effective management, maintenance and care of the animals. In Case 47/95
, the applicant claimed deductions for a partnership loss incurred by a partnership known as 'C Hills'. The ATO reduced these claims by $2,627 and $5,310 for each respective year on the basis there was no business of primary production being carried on at the 400-acre (180-hectare) property owned by the partnership. The only income returned by the partnership was from agistment. There was no evidence to indicate the partnership intended to conduct a business of primary production on the property in the future. The applicant did not provide any evidence to refute this conclusion. Case 38/97
(1997) 36 ATR 1154 also supports the conclusion agistment activities will not amount to carrying on a business. In this case, the taxpayers were a husband and wife who operated as a partnership. In the 1989 financial year, they purchased a 16-hectare farm near Cairns in Queensland. They carried out improvements to the property, such as weed control, fencing, connecting electricity, installing cattle troughs and building cattle yards and used the property for the agistment of cattle owned by a neighbouring farmer. The maximum carrying capacity of the property was 40 animals and the rate paid for agistment ranged between $2 per week per beast to $2.50. One of the taxpayers visited the property around 2 times a week to inspect it and the cattle, but they otherwise relied on neighbours to call them if the cattle strayed or ran out of water. All other aspects of the cattle's care were their owner's responsibility.
It was held the taxpayers were not engaged in the business of agistment. The level of the taxpayers' activity was taken with the lack of a planned approach to a business and the disproportionate level of expenses when compared with income. This led to the conclusion there was no business in the ordinary sense of the word. There were 2 purposes in holding the property, the generation of income and its value as an asset. Based on the evidence presented, the taxpayers were found not to be engaged in a business of agistment or primary production and their activities were not directed to gaining or producing an assessable income. Application to your circumstances The deceased acquired the remaining X% interest in the property in 20XX from their sibling-in-law's children. We consider the deceased's post-CGT interest in the property would have not satisfied the basic conditions for the small business concessions had they disposed of this interest immediately prior to their passing. This is on the basis they do not satisfy the active asset test.
It is accepted in relation to the disposal of the CGT asset, a CGT event A1 under section 104-10 of the ITAA 1997 occurred. This basic condition to be eligible for small business concessions would be satisfied. The CGT event resulted in a capital gain and this basic condition is satisfied. The facts state the deceased satisfies the aggregated turnover test in section 152-10 of the ITAA 1997. This basic condition is satisfied. According to the information provided, the deceased used their post-CGT interest in the property to derive agistment income. From the date the deceased acquired the post-CGT interest in the property to the date of their passing, they were solely using the property for agistment purposes. The property was being rented to a non-affiliated and unconnected entity. It is considered the agistment arrangements would not amount to the carrying on of a business. The activity resembles passive income generation rather than an active business. The agistment to an unrelated entity indicates the activity is passive and lacks a commercial character. The income resembles rent more than business revenue.
As it has been concluded the post-CGT portion of the asset has not been used while carrying on a business, the active asset test, which is a basic condition, is not satisfied. Additionally, the agistment income is regarded as rent and rent is an exception in the active asset test as per subsection 152-40(4) of the ITAA 1997. Therefore, the property will not satisfy the active asset test. As the active asset test is not satisfied, the Estate is unable to use the small business concessions in relation to the sale of the post-CGT interest in the property. The Estate is therefore unable to access the 50% active asset reduction and the retirement exemption. Extension of time Given the deceased would not have been able to access the small business concessions in relation to the sale of the X% portion of the property acquired in 20XX, the Commissioner will not allow an extension of time under subsection 152-80(3) of the ITAA 1997. Issue 2 Question 1 Summary
Beneficiaries are entitled to the income of the Estate as it has been administered. As the Estate has been fully administered and the net residue has been ascertained, the beneficiaries have a proprietary interest in the Estate and the income of the Estate. The beneficiaries will be presently entitled to the income of the Estate to the extent it was paid to them or for their benefit. If no beneficiary has been made presently entitled the Trustee is liable for the tax. Detailed reasoning The taxation of income earned in a Deceased Estate trust will depend on whether the beneficiaries have present entitlement to the income of the trust. The beneficiaries' present entitlement hinges on 2 factors: • whether the Trustee has made them specifically entitled to some of the income, or • if the Deceased Estate had been fully administered and the residue has been calculated. Present entitlement has been discussed in case law including FC of T v. Whiting (1943) 68 CLR 199; 7 ATD 179 and Taylor Trust, Trustees of v. FC of T (1970) 119 CLR 444; 70 ATC 4026.
For a beneficiary to be presently entitled to trust income, the following conditions must be satisfied: • The beneficiary must have an indefeasible, absolutely vested, beneficial interest in possession in the trust income. That is, the interest must not be contingent. This means the beneficiary must have the right to demand immediate payment (or would have had the right to demand payment had they not been under legal disability); • The income must be legally available for distribution to the beneficiary. In the case of a deceased Estate, the beneficiaries will not be presently entitled to income until it is possible to ascertain the residue with certainty (after provision for debts, legacies, etc). Paragraph 9 of Taxation Ruling IT 2622 Income tax: present entitlement during the stages of administration of deceased estates sets out:
Beneficiaries cannot enjoy present entitlement to income derived by a deceased estate during the administration of the estate. Income of a deceased estate in income years before the administration of the estate is complete, is the income of the executors or administrators ... no beneficiary is presently entitled to the income derived. This means that during the administration of the Estate the beneficiary does not have a presumption of present entitlement and where no beneficiary is presently entitled to the income of a trust, the Trustee is made liable for the tax payable under section 99 of the ITAA 1936. However, during the intermediate administration of a Deceased Estate, the administrator may decide part of the net income of the trust will not be required to pay for debts. Some of the income may be paid to or for the benefit of the beneficiaries and then the beneficiaries would be presently entitled to the income to the extent of the amounts paid to them only. When the residue of the Estate has been ascertained and the Estate has been fully administered, residuary beneficiaries will then enjoy present entitlement to the income derived by the Estate.
In this case the Estate has been fully administered and the residue has been calculated. As the Estate has been fully administered, the beneficiaries have present entitlement to the income of the Estate.