Edited version of your written advice

Authorisation Number: 1012831538126

Ruling

Subject: Capital gains tax - deceased estate - Commissioner's discretion to extend the 2 year period

Question

Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to the two year period?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2016

The scheme commences on

1 July 2015.

Relevant facts and circumstances

The deceased purchased the property before 20 September 1985.

The property had a land area of a number of acres which had originally consisted of a number of blocks, with a dwelling on one of the blocks. These blocks had been amalgamated into one block a number of years after the deceased had purchased the property, resulting in one block with a dwelling located on it.

The property is located in a coastal area, with expansive views.

The deceased passed away after 20 September 1985.

The deceased's will named one of their children as the trustee and beneficiary of their estate, and bequeathed their beneficiaries an equal share of their estate.

Prior to the deceased passing away, one of the beneficiaries of the deceased's estate (the
Beneficiary) had voiced that they held certain views about how the property should be dealt with by the deceased's estate upon the deceased passing away. Those views were based on statements made at various times by the deceased, but were not contained in the deceased's will. The Beneficiary had let it be known that they intended to make an issue of those views.

The Beneficiary filed a caveat in the Supreme Court of X a few months after the deceased had passed away, and did not advise anyone that they had filed the caveat.

It was after some time had passed that the Beneficiary had made a comment to the Trustee, and as a result of the comment the Trustee had commenced a search of the Supreme Court X and had discovered that the caveat had been filed. The Trustee had obtained a copy of the caveat from the Supreme Court of X.

The Trustee engaged the services of legal representatives the legal firm) to provide legal advice. The legal advice provided by the legal firm was for the Trustee to not conduct any action for a number of months and wait and see what action/s the Beneficiary undertook before the Trustee made an application for the granting of probate. The Beneficiary had a number of months from the date the deceased passed away to lodge a claim against the deceased estate. Also the caveat lodged by the Beneficiary had to be lodged again after a number of months; otherwise it ceased to have any effect.

The Beneficiary did not pursue any course of legal action against the deceased's estate and an application for the grant of probate was lodged by the Trustee after the period recommended by the legal firm had lapsed.

Probate was granted almost 12 months after the deceased had passed away.

Upon the granting of probate, outstanding organisational matters of the deceased estate had to be attended to and advice obtained on the best approach to be adopted in relation to the disposal of the property.

A spouse of one of the beneficiary's (Person A) was employed in the real estate industry, and with the agreement of the Trustee of the deceased's estate, had spoken to a number of real estate agents about the disposal of the property.

Person A had sought the opinions from real estate agents as to the property's value and the best way to dispose of it.

A number of real estate agents were approached to provide submissions on the disposal of the property, with responses received from some real estate agents.

Conflicting methods of sale had been provided from the real estate agents.

The Trustee met with an arborist at the property over a year after the deceased had passed away, who recommended the removal of a number of trees. One of the trees on the property is dead, and while the arborist had advised that it was not a risk to anyone living in the dwelling on the property, they had recommended that for appearance sake it be removed as its dead appearance would mean that people would assume that they were at risk. Prior to the removal of the trees, the arborist had recommended that property be slashed, and surplus vegetation on the property had been removed. The arborist had stated they could provide the name and contact number of a person who could undertake the work, and the Trustee had made repeated attempts to obtain those details from the arborist over a number of months without success.

The Trustee contacted a number of other firms to enquire whether they could undertake the arboreal and clean-up work on the property, without success.

Around 23 months after the deceased passed away, the Trustee had advised an agent from one of the real estate agents previously consulted, that the Trustee was going to use that real estate agent to dispose of the property.

The agent has provided a method of sale which outlines that they:

• intend to gather information that would answer any queries from potential buyers and that information would be provided to potential buyers during a four week sale campaign

• the town plan allows for the property to be subdivided into four one acre lots and he wanted to obtain an estimate of surveyor's costs and titles office costs in relation to the subdivision of the property if a buyer wanted to subdivide the property, which have been received; and

• to clean away the surplus vegetation to open up the views, putting the property into a presentable condition.

A town planner has been engaged to provide information and estimate of the costs associated with the subdivision of the property.

A local council has sent a Plan (the Plan) to the state government for ministerial approval.

The Trustee submits that they would like to be able to know how the approved Plan would affect the property and assist them in complying with the responsibility of looking after the interests of the beneficiaries of the estate in obtaining a reasonable price on the disposal of the property.

The property is currently being rented out.

The Trustee submits that the following needs to be completed before the disposal of the property begins:

1. the estimated costs of subdividing the property must be received from the town planner and a survey plan showing the boundaries if someone wants to divide the property into blocks

2. the property needs to be slashed; and

3. the arborist needs to remove a number of trees after the property has been slashed.

You have provided a number of documents, which should be read in conjunction with, and forms part of the description of the scheme for the purpose of this private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-160

Income Tax Assessment Act 1997 Section 118-165

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

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.

In 1986, an explanatory memorandum was released which introduced CGT with the exemption period of 12 months. This meant that trustees or beneficiaries of a deceased estate had 12 months from the date of the deceased passing away to dispose of an inherited dwelling to be eligible for the exemption. The intention behind this legislation was that the inherited dwelling was to be immediately sold after the date the deceased passed away.

This period was extended to two years from 1996 to allow for situations where the trustees or beneficiaries of a deceased estate had difficulty arranging an orderly sale of the deceased's dwelling within the current 12 month period. This extension gave trustees and beneficiaries more time to make appropriate arrangements by extending the period by 12 months.

However, the Commissioner has the power under section 118-195 of the ITAA 1997 to extend the two year period to dispose of an inherited dwelling in relation to CGT events that happened in the 2008/09 year and later income years in accordance with the explanatory memorandum (EM) to the Bill that added the discretion to section 118-195 of the ITAA 1997, (the Tax Laws Amendment (2011 Measures No 9) Bill 2011). This enables a trustee or beneficiary of a deceased estate to apply to the Commissioner to grant an extension of the two year time period to dispose of the deceased's dwelling, 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:

• the ownership of a dwelling or a will is challenged;

• the complexity of a deceased estate delays the completion of administration of the estate;

• a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury); 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.

These examples are not exhaustive, but provide guidance on what factors the Commissioner would consider reasonable to exercise his discretion to extend the two year period to dispose of an inherited dwelling.

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. 

Whether the Commissioner will exercise his discretion under subsections 118-195(1) and 118-200(3) will depend on the facts of each case.

Other factors which may be relevant include but are not limited to:

• the sensitivity of personal circumstances of the beneficiary and other surviving relatives of the deceased

• the degree of difficulty in locating the beneficiary to prove the will.

The relevance and weight to be given to each of the factors described above will depend upon the circumstances of each particular case.

Examples of reasons considered not to be acceptable for exercising the Commissioner's discretion may include:

• waiting for the property market to pick up before selling the house

• delay due to refurbishment of the house to improve the sale price

• inconvenience on the part of the trustee or beneficiary to organise the sale of the house

• unexplained periods of inactivity by the executor in attending to the administration of the estate.

It is considered that the trustee has a choice in the situations described above. Accordingly, the Commissioner would not exercise the discretion under those circumstances.

Application of the Commissioner's discretion to your situation

In this case the Commissioner has decided not to exercise his power to extend the two year period available to the trustee of the deceased estate to dispose of the inherited property for the purposes of section 118-195 of the ITAA 1997.

When making our decision we have taken the following into consideration when making our decision:

• we accept that the administration of the estate had been delayed due to the actions of a beneficiary of the deceased's estate, and the potential litigation and/or challenge to the deceased's will.

However, probate on the deceased's estate had been granted around twelve months after the deceased had passed away. Therefore, you had around twelve months to dispose of the dwelling from the time that probate was granted until the two year period passed

• the deceased's estate is not viewed as being of a complex nature. Therefore, this is not a factor that the Commissioner would take into consideration when making the decision on whether or not to exercise his discretion to extend the two year period to dispose of the property

• you have not advised us that you were delayed from attending to the deceased's estate due to personal circumstances that prevented you from disposing of the property

• the dwelling has not been put on the market as at this point. Therefore, the delay in the disposal of the dwelling cannot be attributed to the settlement of a contract of sale over the dwelling being unexpectedly delayed or falling through under circumstances outside of your control

• you have stated that you sought the services of an arborist to remove a number of trees, and to clean up and slash the property. From your submission, it appears that the purpose of this activity was to remove the impediment to the property's views and to make it visually more appealing to potential buyers.

It is not viewed that state of the flora on the property would have prevented you from being able to dispose of the property, but that you will be undertaking the arboreal and clean-up work to the property to improve buyer appeal and potentially increase the sale price

• you have submitted that the Gold Coast City Plan 2015 (the Plan) had been sent to the Queensland Government for approval.

It is clear that the Commissioner's discretion is meant to be limited to situations where the owner is effectively prevented from selling the property. The price expected to be raised by the sale of the property is not a relevant condition for the exercising of the Commissioner's discretion.

Therefore, the delaying of the disposal of the property until the Plan had been approved by the state government in order to determine how it would impact the property is not viewed as a reason that the Commissioner would view as acceptable for exercising his discretion to extend the two year period to dispose of the deceased's dwelling

• the property is currently rented out. If the property is currently leased for a specified period of time, it could be viewed that this could potentially impact your ability to dispose of the property

• in this case, the deceased's will authorised their trustee to postpone the sale of any assets for as long as they deem fit. You have submitted that you would like to be able to know how the approved Plan will affect the property as it will assist you in complying with the responsibility of looking after the interests of the five beneficiaries of the estate in obtaining a reasonable price for the property.

While we accept that trustees have a fiduciary obligation placed on them under the deceased's will, that obligation is separate to taxation consequences and trustees need to factor this into making their decisions.

Trustees deferring the disposal of the deceased's dwelling to see they can potentially obtain a better price would not be viewed as being an acceptable reason for exercising the Commissioner's discretion when the dwelling has not been disposed of within the two year period from the date the deceased passed away

• you have submitted that advice from a number of real estate agents has been sought in relation to the disposal of the property. While we appreciate that you have been given varying advice on how best to dispose of the property, you had twelve months after the legal proceedings had been finalised to dispose of the property.

It has been your choice not to undertake any of the methods for the disposal of the property suggested on various occasions by the different real estate agents. Based on the information you have provided it appears that your motive for the delay in disposing of the property is more for profit making reasons than a difficulty in disposing of the property

Based on the information and documentation provided, we accept that there was some delay in the administration of the deceased's estate due to the actions of one of the beneficiaries. However, as the trustee of the deceased's estate, you have made choices in relation to the disposal of the property. After considering the facts of your situation it has been determined that the Commissioner's discretion will not be exercised to extend the two year period, as it is viewed that the facts of your situation are not of a nature that would be acceptable for the exercising of the Commissioner's discretion.

Further issues for you to consider

The following information is provided as written guidance. A taxpayer who relies on guidance will remain liable for any tax shortfall if the guidance is incorrect or misleading and they make a mistake as a result (unless a time limit imposed by the law precludes the liability). However, they will be protected against the shortfall penalty and interest on the tax shortfall provided they relied on that guidance reasonably and in good faith.

In accordance with section 118-200 of the ITAA, a partial exemption of the capital gain or capital loss made on the disposal of an ownership interest in a dwelling that passed to an individual as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate and section 118-195 of the ITAA 1997 does not apply.

As the Commissioner has not exercised his discretion to extend the two year period to dispose of the property under section 118-195 of the ITAA 1997, the capital gain made on the property from the date the deceased passed away until the property is disposed of will be taxable.

As section 118-195 of the ITAA 1997 does not apply to your situation, you may be entitled to a partial exemption of the capital gain or capital loss made on the disposal of the property under section 118-200 of the ITAA 1997.

Note: If the property is subdivided, no CGT event will occur at that time if you retain the ownership interest in the blocks of land. However, when the blocks are disposed of, only the block on which the dwelling is located will be eligible for the partial exemption.

There are no exemptions or exceptions to disregard any capital gain made on the disposal of a vacant block of land which is not disposed of with a dwelling other than if a pre-existing dwelling on the vacant block of land was accidently destroyed (sections 118-160 and 118-165 of the ITAA 1997.

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