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Ruling

Subject: Commissioner's discretion under section 118-195 of the Income Tax Assessment Act 1997

Question:

Will the Commissioner exercise his discretion and extend the two year time limit in which the Trustee could have disposed of the property for the purposes of section 118-195 of the Income Tax Assessment Act 1997?

Answer:

No.

This ruling applies for the following period:

1 July 2010 to 30 June 2012.

The scheme commenced on:

1 July 2010.

Relevant facts and circumstances:

The deceased acquired residential property (the property) prior to 20 September 1985.

The property was the deceased's main residence up to his/her date of death.

The deceased passed away after 20 September 1985.

The deceased will nominate a number of beneficiaries, one of whom was also named as executor of the deceased's estate.

A relative of the deceased was living in the property when the deceased passed away and continued to reside there until the property was sold.

None of the beneficiaries had a right to occupy the property under the will.

The executor was aware of the requirement to dispose of the property within two years of the date of death for capital gains tax purposes.

The executor waited 18 months from the date of death to put the property on the market.

A contract for the sale of the property was entered into less than three years after the date of death and settled the following month.

The property was not used by the trustee to produce assessable income after the date of death.

There were no challenges to the will during administration of the estate.

There were no unforeseen or serious personal circumstances arising during the two year period after death that would have prevented the trustee from administering the estate.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 118-195

Tax Laws Amendment (2011 Measures No. 9) Act 2012

Reasons for decision

Commissioner's discretion under Section 118-195 of the ITAA 1997

In certain circumstances, section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the trustee of a deceased estate may disregard an assessable gain or loss made from the disposal of a dwelling that passed to them in their capacity as trustee of a deceased estate.

In relation to dwellings acquired by a deceased person before 20 September 1985 but who passed away after that date, one of the circumstances for the exemption under section 118-195 of the ITAA 1997 to apply is that the dwelling needs to be disposed of by the trustee within two years of the date of death. However, the Commissioner has the power under section 118-195 to extend this two year period.

The tax law provides no guidance on the circumstances in which the Commissioner might exercise his discretion to extend the two year disposal period available to trustees under section 118-195 of the ITAA 1997. However, the Guide to capital gains tax 2011-12, and the Explanatory Memorandum (EM) to Tax Laws Amendment (2011 Measures No. 9) Bill 2011 (which later became Tax Laws Amendment (2011 Measures No. 9) Act 2012) and which introduced the amendment to section 118-195 of the ITAA 1997 providing for the Commissioner's discretion to extend the two year disposal period) both state that:

the Commissioner would be expected to exercise this discretion in situations where:

· the ownership of a dwelling or a will is challenged,

· the complexity of a deceased estate delays completion of administration of the estate,

· a trustee is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (severe illness or injury are cites as examples of what would constitute such circumstances), or

· settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control, and

· that in that in considering whether or not to exercise this discretion, the Commissioner is expected to consider the period the trustee held the ownership interest in the dwelling and whether and to what extent the dwelling is used to produce assessable income during the trustee's ownership of the dwelling.

The circumstances of this case are such that the Commissioner has decided not to exercise his power to extend the two year period available to the executor to dispose of the property for the purposes of section 118-195 of the ITAA 1997.

In making this decision, the Commissioner notes that the property was not used to produce income following the deceased's death and was only in the hands of the executor for less than 3 years from the date of death. However, the Commissioner considers the period of less than 3 years to be excessive in this case, primarily because of the period of time taken to place the property on the market.

In particular, the Commissioner notes:

· The executor was clearly conscious of the need to sell the property within two years of the date of death. Despite that awareness, the executor did not place the property on the market until less than two years after the deceased passed away, leaving only X months to dispose of the property if the two year disposal time provided by section 118-195 of the ITAA 1997 was to be met.

· The time that passed between the time the property was placed on the market until it was actually disposed of indicates the property could have been disposed of within, or closer to, the two year period allowed by section 118-195 of the ITAA 1997 had it been placed on the market closer to the date of the deceased's death.

· There was no challenge to the will or to the ownership of the property.

· There was nothing particularly complex about the administration of the estate. The will simply required funds from the disposal of the deceased's assets to be distributed evenly amongst the beneficiaries.

· There were no unforeseen or serious personal circumstances arising during the two-year period after death that would have prevented the trustee from administering the estate.

Conclusion

The Commissioner will not exercise his discretion to allow the executor a period longer than two years to dispose of the property for the purposes of section 118-195 of the ITAA 1997.

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