They say that two things in life are inevitable – death and taxes. This doesn’t mean that the two have to happen at the same time. Generally where there is a change of ownership in small business, a CGT event is deemed to have occurred which may result in a capital loss or taxable gain. When a person dies, their assets are transferred to their legal personal representative (LPR) or are acquired by a surviving joint tenant, if one exists, and as such the Capital Gains Tax rules apply.
However any capital gain or loss is ignored, even if only temporarily, in the following circumstances;
- When assets are transferred from the deceased to a legal personal representative; or
- When assets are effectively acquired by a surviving joint tenant, if one exists; or
- Where the LPR transfers the asset to a beneficiary of the estate.
The LPR, beneficiary or surviving joint tenant is generally, taken to have acquired the assets on the date of death at the price paid by the deceased, except for assets the deceased acquired before 20 September 1985 whereby market value at date of death is used.
By transferring the cost base (price paid) of the asset any unrealised capital gain or loss is deferred until the later sale of the asset by the LPR, beneficiary or joint tenant.
Sometimes the asset in question will be a business asset which opens up another whole range of issues to do with the small business CGT concessions. Fortunately 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 (longer if an extension is granted), and
- the asset would have qualified for the small business CGT concessions if the deceased had disposed of the asset immediately before their death.
Provided these conditions are satisfied, the small business CGT concessions are also available to the trustee of a testamentary trust, a beneficiary of such a trust, and a surviving joint tenant.
Hold on… what if it takes longer than two years to sell?
If a person carrying on a business dies and their business assets are transferred to their LPR, beneficiary, surviving joint tenant, or trustee or beneficiary of a testamentary trust (the transferee), and the sale of assets occurs after the two-year time limit then the active asset test is applied to the transferee. This can create a significant tax liability upon the sale of the business if the transferee does not continue to carry on the deceased’s business, or use the asset in another business. Although the tax office may allow an extension to the two years, there is a real risk that after the two-year time limit, the active asset test may not be satisfied and the small business concessions may not be available.
For more information, please contact our team.
