1 Will the Commissioner exercise the discretion under subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997), together with the requirements of subsection 152-80(1) of the ITAA 1997, to extend the time limit to DDMMYY for applying the small business capital gain tax (CGT) concessions to the sale of the farmland?
1 Yes. Question 2 Will the Commissioner exercise the discretion under paragraph 103-25(1)(b) of the ITAA 1997 to allow an extension of time until DDMMYY to make a choice to apply any available small business CGT concessions? Answer 2 Yes. Question 3 Was the deceased entitled to apply the 50% small business active asset reduction under subdivision 152-C of the ITAA 1997 and small business retirement exemptions under subdivision 152-D of the ITAA 1997 just prior to their death? Answer 3 Yes. This ruling applies for the following period : Year ended 30 June 20XX The scheme commenced on: 1 July 20XX
Death and Estate Administration The deceased passed away in a farming accident on DDMMYY at the age of XX. They were survived by their spouse and their X children. As they died intestate, the deceased's spouse became the sole beneficiary of the estate under XXXX intestacy laws. Letters of Administration were granted to them on XX March 20XX. Ownership and Use of Farmland At the date of death, the deceased held X of the X lots comprising the farming property, acquired on XX February 20XX. The remaining lots were owned by: • XXX and XXX as joint tenants (X lots), and • The X & X XXXX (X lots), for which XXX and XXX each held X% of the units. The land was used by the XX and XX Partnership, which operated a primary production business involving crop cultivation, livestock grazing, sheep farming and cereal grain production. The partners of the partnership were the deceased, XXX and XXX. The deceased worked full-time on the farm and did not carry on a business outside the primary production partnership. The Unit Trust leased its X lots to the partnership.
For the year ended 30 June 20XX the aggregated turnover of the partnership and its connected entity (X & X Unit Trust) was $X. Court Proceedings and Partnership Dispute On XX April 20XX, the spouse commenced Supreme Court proceedings seeking to wind up the partnership and recover the estate's entitlements. The dispute continued for about three years. On XX April 20XX, the spouse sought orders to dissolve the partnership, appoint a receiver/manager, sell partnership assets, and distribute the deceased's entitlements, including unpaid salary (X July 20XX-XX April 20XX) and post-death profit share. The sale of farming property was complicated by its fragmented ownership across three entities. A Heads of Agreement was reached on X June 20XX, with the parties appointing XXXXXXXX Chartered Accountants as trustees for the sale. Implementation work followed in December 20XX, and final court orders were made on XX December 20XX. Sale of Farming Property
The property was sold at auction on XX March 20XX, with settlement occurring on X May 20XX. The estate made a capital gain on its X lots. Delays in the sale resulted from ongoing litigation, which prevented the administrator from disposing of estate assets earlier. Table 1: Chronological Table of Events Date Event XX April 20XX Deceased died in a farming accident; death investigated by Police and SafeWork XXXX. May 20XX Dispute regarding beneficiaries of the deceased's life insurance policy. X January 20XX Life insurance proceeds paid to XXX and XXX without the spouse's knowledge. XX February 20XX The spouse applied for Letters of Administration. XX March 20XX Letters of Administration granted to the spouse. XX April 20XX The spouse commenced Supreme Court proceedings regarding partnership dissolution. April 20XX XXX and XXX initiated (then discontinued) family law proceedings. XX November 20XX Supreme Court filing fees are paid in preparation for proceedings. January 20XX Engagement of barristers, lawyers, valuers and experts for trial. XX March 20XX First pre-trial hearing. XX April 20XX The spouse sought court orders to dissolve partnership and distribute estate entitlements.
XX June 20XX Three-day partnership trial. X June 20XX Heads of Agreement executed, trustee appointed to sell farming property. XX December 20XX Post-trial implementation work completed. XX December 20XX Final court orders drafted. XX December 20XX Court orders executed; trustee formally appointed. XX March 20XX Farming property sold at auction. XX May 20XX Settlement completed on farming property sale.
Income Tax Assessment Act 1997 section 152-80 Income Tax Assessment Act 1997 Division 152-C Income Tax Assessment Act 1997 Division 152-D Income Tax Assessment Act 1997 section 152-10 Income Tax Assessment Act 1997 section 152-305 Income Tax Assessment Act 1997 section 152-35 Income Tax Assessment Act 1997 section 152-40
Question 1 and 2 Summary The Commissioner will exercise the discretion under subsection 152-80(3) of the ITAA 1997, together with the requirements of subsection 152-80(1) of the ITAA 1997, to extend the time limit to X June 20XX for applying the small business CGT event to the sale of the farmland. Also, to extend the time to XX March 20XX for the estate to make a choice to apply any available small business CGT concessions. Detailed reasoning Section 152-80 of the ITAA 1997 allows beneficiaries of a trust created under a deceased individual's will to access the small business CGT concessions in the same manner the deceased would have been entitled to immediately before their death. For the trustee to apply the concessions on the sale of the deceased's CGT assets, the following conditions must be met: • the CGT asset must form part of the deceased's estate; and • a CGT event must occur in relation to that asset within two years of the individual's death. The law also gives the Commissioner discretion, under subsection 152-80(3) ITAA 1997, to extend this two-year timeframe.
In determining whether the discretion to allow further time would be exercised, the Commissioner has considered the following factors: • evidence of an acceptable explanation for the period of the extension requested (and whether it would be fair and equitable in the circumstances to provide such an extension) • prejudice to the Commissioner which may result from the additional time being allowed (but the mere absence of prejudice is not enough to justify the granting of an extension) • unsettling of people, other than the Commissioner, or of established practices • fairness to people in like positions and the wider public interest • whether any mischief is involved, and • consequences of the decision. Make a choice
According to ATO ID 2003/103, once a taxpayer actively chooses to apply a particular CGT concession, that choice is generally irrevocable. However, where the taxpayer did not consider the CGT concessions at all, no choice is taken to have been made. In such cases, and provided the Commissioner grants further time, the taxpayer may later make a valid choice to apply a CGT concession and amend their return to reduce or disregard the capital gain. Application to your circumstances In this case the estate was subject to court proceedings and an ongoing dispute which delayed the sale of the properties. Having considered the relevant facts the Commissioner is able to apply the discretion in subsection 152-80(3) of the ITAA 1997 and allow an extension of time until X June 20XX.
Further, the estate lodged the 20XX income tax return without applying the small business CGT concession because the CGT event occurred outside the ordinary two-year period following death and access to the concessions depended upon first obtaining the Commissioner's discretion under subsection 152-80(3) of the ITAA 1997. The Commissioner will allow further time, until XX March 20XX, for the estate to make a choice to apply the concessions. Question 3 Summary The deceased was entitled to the 50% small business active asset reduction under Subdivision 152-C of the ITAA 1997 and small business retirement exemptions under Subdivision 152-D of the ITAA 1997 just prior to their death. Detailed reasoning To be eligible for any of the CGT concessions, you must first meet the basic eligibility conditions. • a CGT event happens in relation to a CGT asset of yours in an income year; • the event would (apart from Division 152 of the ITAA 1997) have resulted in the gain; • at least one of the following applies: ˗ you are a small business entity for the income year; ˗ you satisfy the maximum net asset value test
˗ you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership; ˗ the conditions mention in subsections (1A) or (1B) are satisfied in relation to the CGT asset is an interest in an asset of the partnership (a) the CGT asset satisfies the active asset test All the concessions, except for the small business 50% active asset reduction, have additional requirements you must meet. Active asset test An asset passes the active asset test if it has been an active asset of yours for at least: • 7.5 years during the test period (if you've owned it for more than 15 years) • half of the test period (if you've owned it for 15 years or less). The test period begins when you acquired the asset and ends at whichever occurs first: • the capital gains tax (CGT) event relating to the asset • the business ceases or is sold, if the CGT event occurred 12 months or less after this. Retirement exemption Under subsection 152-305(1) of the ITAA 1997 if you are an individual, you can choose to disregard all or part of a capital gain if:
• the basic conditions are satisfied and • if you are under 55 years just before you make the choice, you contribute an amount equal to the asset's CGT exempt amount to a complying superannuation fund. However, there is no requirement to contribute an amount to a complying superannuation fund where the individual has passed and the legal personal representative is accessing the concession via section 152-80 of the ITAA 1997. Application to your circumstances • A CGT event would have occurred in relation to the asset - The farmland was a post CGT asset. Had the deceased disposed of the land prior to death, a CGT event would have occurred. • The event would have resulted in a capital gain - The value of the farmland had increased between purchasing it on X February 20XX and the deceased's date of death on X April 20XX, meaning disposal prior to death would have resulted in a capital gain.
• At least one of the conditions in paragraph 152-10(1)(c)(i)(iv) of the ITAA 1997 applies - the relevant condition is paragraph 152-10(1)(c)(iv) of the ITAA 1997, being the "passively-held asset" rule, which is clarified in subsection 152-10(1B) of the ITAA 1997. The deceased met each of the requirements in subsection (1B): Table 2: Requirements in subsection 152- 10 (1B) of the ITAA 1997 Requirement (s 152-10(1B)) Satisfied Explanation (a) The taxpayer is a partner in a partnership ✔ The deceased was a partner in the Partnership at the time of death. (b) The partnership is a CGT small business entity ✔ For the relevant year the aggregated turnover of the partnership and its connected entity was less than $2 million. (c) The taxpayer does not carry on a business other than as a partner ✔ The deceased did not carry on a business outside the primary production partnership. (d) The CGT asset is not an interest in a partnership asset ✔ The farmland was owned directly by the deceased. (e) The business carried on in partnership is the business that uses the asset ✔ The partnership used the farmland in its primary production business from 20XX to the deceased's death.
Accordingly, the deceased met section 152-10(1)(c)(iv) of the ITAA 1997. The deceased owned the farmland for approximately X years (X February 20XX - X April 20XX), and the partnership used the land in its primary production business throughout the entire period. Therefore, the farmland satisfies the active asset test As the deceased satisfied the basic conditions, they would have been entitled to the 50% active asset reduction under Subdivision 152-C of the ITAA 1997. The deceased also would have qualified for the retirement exemption. The requirement in paragraph 152-305(1)(b) of the ITAA 997 to contribute the exempt amount to a complying superannuation fund does not apply to deceased estates due to paragraph 152-80(2)(b) of the ITAA 1997.