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To obtain the benefit of the small business CGT concessions (“the SB concessions”) an “active asset” must be disposed of.  Among other things, if an asset has been owned for 15 years or less, the asset must be an active asset for at least half of a specified period.  If the asset is owned for more than 15 years, the asset must have been an active asset for at least 7 ½ years during the specified period.

 

The specified period begins when the taxpayer acquired the asset.  The end time of the specified period is variable.  The end date is the earlier of two dates. 

 

The first end date of the specified period is the date of the CGT event.  This is usually the date of the making of the contract to sell the asset.

 

The second end date of the specified period has operation when the business to which the asset relates has ceased.  However, at first instance, the business must have ceased to be carried on in the 12 months prior to the CGT event occurring.  Nevertheless, the Tax Office has the discretion to allow a period greater than 12 months.

 

Here is an example using edited private advice number 1052189377322.  You can find this on the ATO legal database, which is part of the ATO website.  The advice was issued on 7 November 2023.  The facts outlined in the advice aren’t entirely clear.  Below is my understanding of what occurred.  I have made up some names and dates to make the example easier to understand.

 

Prior to September 1985 Sarah inherited farming land from her deceased father.  She and her husband, Patrick farmed the land for many years.  Sarah died in October 2017.  Under her will, the land was inherited by Patrick and Patrick became the legal owner of the land in January 2018. 

 

Patrick continued to farm the land under a contracting/share farming agreement.  However, Patrick was aged and after about 6 months he could no longer operate the farming business.  The farming business ceased at this time.  A decision was made to lease the land to a third party for a 2-year period.  Patrick was diagnosed with dementia and died in December 2018.

 

The land passed to Patrick’s legal personal representative who administered his estate.  It was decided by the legal personal representative to sell the land after the two-year lease period was completed.  The contract to dispose of the land was signed on 1 August 2020.  The legal personal representative wanted to claim the SB concessions on the gain made from the disposal of the land.

 

The first issue (not mentioned in the edited private advice) is whether a legal personal representative (the executor) of Patrick’s estate can disregard a capital gain under the SB concessions.  This is able to be done under section 152-80 of the 1997 Tax Act.  For this provision to apply, the CGT event must happen within 2 years of the relevant individual’s death.  This occurred because Patrick died in December 2018 and the CGT event occurred on 1 August 2020. 

 

The more problematic question, on which the ATO ruling was sought, was whether the land was an active asset.  Particularly, had the asset been used for at least half the specified period (referred to above) as an active asset?  Patrick conducted the business while he was owner of the land but the business ceased in June 2018.  The CGT event occurred in August 2020.  The land had been leased (therefore not an active asset) for a period of two years while the period that it was used to operate a business (therefore an active asset) was only 6 months.  This means, on its face, the land was an active asset for only about 19% of the time and not the 50% required.

 

However, because the business had ceased, the executor of the estate applied for the Commissioner to exercise his discretion under s.152-35(2)(b)(ii) of the 1997 Tax Act to extend the period beyond 12 months between the CGT event (1 August 2020) and the cessation of the business in June 2018.  This is a period of about 25 months.

 

The Commissioner did exercise his discretion due to the ill-health of Patrick.  The edited private advice says “It was considered that the taxpayer had the intention to take over the business, however, their health prevented them from continuing the business which was outside their control.  Therefore, it is fair and equitable to allow the extension (of time).”

 

Accordingly, the SB concessions could be claimed. 

 

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