Edited version of your written advice

Authorisation Number: 1012862888339

Date of advice: 19 August 2015

Ruling

Subject: Capital gains tax - deceased estate - Commissioner's

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:

Income year ending 30 June 2016

The scheme commences on

1 July 2014.

Relevant facts and circumstances

The deceased purchased a property (the property) before 20 September 1985, which was their main residence.

The deceased passed away a number of years later after 20 September 1985.

The deceased bequeathed the property to their children.

The property is subject to re-zoning that is being undertaken by the local council.

The property has not been put on the market by the Trustee of the Estate as at the present time.

You have submitted the following:

• It has been the intention of the Administrator/Legal Personal Representative of the Estate to dispose of the said property within the required two years of the deceased's death. The property is subject to a re-zoning proposal that is currently with the local council and as at the end of the period of two years from the deceased's death; the re-zoning proposal is still awaiting approval from the council. Once approved, the re-zoning proposal must be approved by the relevant authority. As the re-zoning proposal has yet to be granted from either jurisdiction, the Administrator/Legal Personal Representative of the Estate has been unable to sell the property

• The re-zoning has yet to be approved. The re-zoning will increase the sales value of the property

• The re-zoning of the property prevented the Trustee from disposing of the property due to the fact that the sale would have been subject to zoning approval being given on the block for subdivision purposes. Without this approval the Trustee would not be able to sell the property with re-zoning approval

• The property had not been put on the market; and

• The issue that prevented the earlier sale of the property is the length of time that the council and the relevant Government organisation have taken in actioning the re-zoning.

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 19XX, 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 19XX 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; and

• 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, or

• 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:

• you have not advised that the ownership of the property and/or the deceased's will was challenged

• you have not advised us that the deceased's estate was 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 that the Trustee of the deceased's estate was delayed from attending to the administration of the estate due to any personal circumstances that prevented them from disposing of the property

• the property 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 the Trustees control

• you have submitted that the re-zoning would increase the sales value of 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 if 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 stated that the delay in disposing of the property was due to the re-zoning of the property which had prevented an earlier sale of the property.

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 re-zoning had been approved 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 property; and

• other than your submission that the re-zoning of the property has delayed the disposal of the property, you have not provided any other explanation for the Trustee's inactivity in disposing of the property, or any other issues that may have delayed the disposal of the property.

Based on the information provided, it is viewed that the delay in the disposal of the property is due to the choices made by the Trustee of the Estate. That is, to delay the disposal of the property until after the re-zoning of the property had been approved.

You have not provided any explanation for why the property could not be disposed of by the Trustee within the two year period after the deceased passed away, merely that the Trustee had made the choice to hold off from disposing of the property until it could be determined how the re-zoning would impact on the value 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.

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