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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012541502632

Ruling

Subject: Deceased estate income tax rates and the discretion to extend the two year rule for main residence

Question 1

Will the Commissioner exercise the discretion to extend the two year rule in regards to the disposal of a deceased's main residence?

Answer

Yes.

Question 2

Can the Commissioner extend the concessional period of three tax years at the general individual rates, with the benefit of the full tax-free threshold for a deceased estate?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2012

Relevant facts

The Will has been challenged by one of his beneficiaries, as has the request for probate filed by the nominated executor. This has caused the administration of the estate to be more prolonged than would have ordinarily been the case.

There has been a long process of mediation and negotiation. The assets were sold soon after probate was granted.

It is expected that the estate will be fully administered by the end of the calendar year.

The main residence was acquired pre 1985. It was not used to produce assessable income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

Income Tax Rates Act 1986 Schedule 10 Part 1

Reasons for decision

Summary

The Commissioner will exercise the discretion to extend the two year rule in regards to the disposal of a deceased's main residence, because all the necessary requirements are met for this discretion.

The Commissioner cannot extend the concessional period of three tax years at the general individual rates, with the benefit of the full tax-free threshold for a deceased estate, as there is no discretion available for him to do this.

Detailed reasoning

Capital gains tax

Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a trustee of a deceased estate to disregard a capital gain or capital loss made from a Capital Gains Tax (CGT) event (ie. sale of the property) that happens in relation to a dwelling where:

The ownership of the dwelling passed to trustee of the deceased estate on the owner's death,

The deceased person died after 20 August 1996,

The deceased acquired the dwelling before 20 September 1985, and

The dwelling was the deceased person's main residence just before death.

You meet the above requirements. Therefore, you may be eligible to disregard the capital gains tax if:

- you dispose of your interest in the dwelling within two years of the deceased's death, or within a longer period allowed by the Commissioner.

A trustee of a deceased estate may apply to the Commissioner to grant an extension of the two year time period, where the CGT event happens in the 2008-09 income year or later income years. Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example:

These examples are not exhaustive.

In exercising the discretion the Commissioner will also take into account whether and to what extent the dwelling is used to produce assessable income and for how long the trustee or beneficiary held the ownership interest in the dwelling. 

In your case, the Will has been challenged by one of the beneficiaries, as has the request for probate. There has been unsuccessful mediation meetings and extended negotiations with beneficiaries. The dwelling was sold soon after the granting of probate.

Your delay in selling the dwelling falls into the examples stated above and was out your control. As such the Commissioner will exercise his discretion in your case.

Applicable income tax rates

The Commissioner has a discretion not to apply the penalty rates under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936). Subsection 99A(2) of the ITAA 1936 states that one of the situations where the section does not apply is where the trust arises out of a Will. Section 99 of the ITAA 1936 will apply if the discretion is exercised. The discretion will be exercised in your case as the trust arises out of a Will.

The applicable tax rates where section 99 of the ITAA 1936 applies are set out in Schedule 10, Part 1 of the Income Tax Rates Act 1986. Where there is no beneficiary presently entitled to the income, for the first three tax returns, the deceased estate income is taxed at the general individual rates, with the benefit of the full tax-free threshold. This concessional period of three years cannot be extended. There is no discretion available to the Commissioner.

For the fourth income year and later, there are special progressive tax rates that apply. They are the normal individual rates, without the benefit of the full tax-free threshold. The tax free threshold is limited to $416.

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