Advanced guide to capital gains tax concessions for small business

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Chapter 9 - Death and small business CGT concessions

Assets and Death

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.

The LPR, beneficiary or surviving joint tenant is taken to have acquired the assets on the date of death. Generally the cost base of the assets is transferred to the assets in the hands of the LPR, beneficiary or joint tenant. However market value is used if the deceased acquired the assets before 20 September 1985.

In effect, with the disregarding of any capital gain upon death and transferring the cost base upon death of the asset owner, any unrealised capital gain is deferred until a later sale of the asset by the LPR, beneficiary or joint tenant.

The 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.

Amendments to the law allow surviving joint tenants, trustees and beneficiaries of trusts, (which are established by the will of the deceased) to choose the concessions, were enacted in June 2009 and apply for 2006-07 and later years.

If you became eligible for the concessions as a result of the June 2009 amendments you have until the later of:

• the day the entity lodges its tax return for the income year in which the relevant CGT event happened
• 12 months after the day on which these amendments receive Royal Assent, or
• a later day allowed by the Commissioner.

The extension of time to make a choice applies to CGT events happening before the 23 June 2009.

For the retirement exemption, there is no need for the amount to be paid into a superannuation fund, even if the deceased was less than 55 years old just before his or her death.

The 15-year exemption can also be chosen if the deceased had met the requirements, except that it is not necessary for the CGT event to have happened in relation to the retirement of the individual.

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.

Death and a previous Small Business Rollover

If, before dying, a person still owned a replacement or capital improved asset from an earlier small business rollover, CGT event J2 will happen upon the person's death. This is because the replacement or capital improved asset will stop being the deceased's active asset, having devolved to their LPR.

However, the general rules concerning death, in addition to disregarding any capital gain made on the replacement asset from CGT event A1, will also disregard the capital gain from CGT event J2. Although any capital gain from CGT event A1 is effectively deferred until a later sale of the asset by the LPR or beneficiary, the capital gain from CGT event J2 is not transferred to the LPR or beneficiary. This means that the capital gain from CGT event J2 is permanently disregarded under the general rules concerning death.

Example

• Jack disposed of an active asset and made a capital gain of $400,000. After applying the CGT discount and the active asset reduction, his remaining capital gain was $100,000. Jack acquired a replacement asset (for more than $100,000) and chose the small business rollover, disregarding the remaining capital gain of $100,000. Jack continued to carry on his business using the replacement asset until his death.
• On Jack's death, the replacement asset (which had increased in value) devolved to his LPR. Accordingly, CGT event A1 and CGT event J2 happened. The capital gains from CGT event A1 and CGT event J2 are disregarded under the general rules concerning death. The capital gain on the replacement asset from CGT event A1 is effectively deferred until a later sale of the asset by the LPR or beneficiary. However, the $100,000 capital gain from CGT event J2 is not transferred to the LPR or beneficiary and, as a result, remains permanently disregarded.

ATO references:
NO NAT 3359