Edited version of your written advice

Authorisation Number: 1012929054786

Ruling

Subject: CGT - deceased estate - Commissioner's discretion to extend the two 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 to dispose of the inherited dwelling?

Answer:

No.

This ruling applies for the following period:

Income year ending 30 June 2016.

The scheme commences on:

5 July 2013.

Relevant facts and circumstances

The arrangement that is subject of the private ruling is based on the documentation provided with this application, and those documents form part of, and are to be read with this private ruling.

The deceased purchased the block of land (the property) after 20 September 1985.

A dwelling was located on the property in which the deceased lived in after the settlement on the purchase of the property occurred.

The deceased built a new dwelling (the dwelling) on the property as an owner-builder.

A Certificate of Occupancy was issued for the dwelling around six years after the property had been purchased and the deceased moved from the original dwelling into the dwelling following the issuing of the certificate.

The deceased continued to live in the dwelling until he passed away around four years later.

You were appointed as the Trustee of the deceased's estate.

The deceased's family were of the understanding that if an owner-built home is sold within six and a half years after the issue of the occupancy permit being issued, there is an obligation to obtain a defects report and obtain owner-builder domestic building insurance and that there are potential legal ramifications if a buyer finds a defect that did not appear on the defects report.

For this reason, the deceased's family decided not to sell the dwelling until the six and a half year period after the Occupancy Certificate had issued passed.

The dwelling was put on the market after the six and a half years had passed, with the contract for sale being entered into around 27 months after the deceased had passed away.

The expected date of settlement for the disposal of the dwelling is around 30 months after the deceased passed away.

The dwelling was not used to produced assessable income.

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 118-195

Reasons for decision

Commissioner's discretion to extend the two year period to dispose of an inherited property

In 1986, an explanatory memorandum was released which introduced capital gains tax (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 by Parliament 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.

In certain circumstances, section 118-195 of the 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 after 20 September 1985, for the exemption under section 118-195 of the ITAA 1997 to apply the dwelling must have been the deceased's main residence just before they passed away, was not being used for the purpose of producing assessable income, and one of the following conditions must be met:

• Your ownership interest in the inherited dwelling ends within two years of the deceased's date of death; or

• The dwelling was from the deceased's date of death until your ownership interest in the dwelling ends, the main residence of one or more of:

• The spouse of the deceased; or

• An individual who had a right to occupy the inherited dwelling under the deceased's will; or

• If the inherited dwelling was sold by a beneficiary, that individual.

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 income 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

• the 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 subsection 118-195(1) of the ITAA 1997 will depend on the facts of each case.

Application 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.

We have taken the following into consideration when making our decision:

• The deceased had built the dwelling as an owner-builder, with the Occupancy Certificate being issued around six years after the property had been purchased

• The deceased passed away over 50 months after the Occupancy Certificate was issued

• Probate on the deceased's estate was granted around nine months after the deceased had passed away

• The deceased's family had decided not to sell the dwelling until the six and a half year period after the Occupancy Certificate had passed

• The dwelling has been sold with settlement expected to occur around 30 months after the deceased had passed away

• We have not been advised of any legal impediment which prevented the sale of the dwelling

• We have not been advised of any challenge to the deceased's will which caused the delay in the disposal of the dwelling

• We have not been advised of any reason why the Trustee could not attend to the administration of the deceased's estate and sell the dwelling

• We have not been advised of any circumstances outside of the control of the Trustee and/or the deceased's family members which has contributed to the delay in the disposal of the dwelling

• The information and documentation provided does not support that the deceased's estate was of a complex nature

• The Commissioner would expect that affected beneficiaries would act promptly to ensure that the affairs of the estate were being administered appropriately

• The Trustee should have been aware that there were conditions that had to be met if the sale of the property was to be exempt from the capital gains provisions; and

• The Trustee should have been aware that the capital gains tax provisions might apply if the sale of the property was delayed beyond two years from the date the deceased passed away.

Conclusion:

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.

In this case, the delay in the disposal of the dwelling was caused by the choice made by the Trustee and the deceased's family not to obtain a defects report and owner-builder domestic building insurance so that the dwelling could be sold. They had made the choice not to sell the dwelling until after the six and a half year period from the date the Occupancy Permit had been issued had passed.

A contract for sale of the dwelling had been entered into shortly after the dwelling had been put on the market, with settlement occurring around 30 months after the deceased had passed away.

The quick sale of the dwelling once it was put on the market would tend to support that if the dwelling had been put on the market during the two year period after the deceased had passed away that it would have been sold within the two year period. However, the choice made by the Trustee and the deceased's family not to sell the dwelling until after the six and a half year period had passed had prevented the dwelling from being sold within the two year period.

Based on the information provided 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 this situation are not of a nature that would be acceptable for the exercising of the Commissioner's discretion.

As the Commissioner has not exercised his discretion to extend the two year period to dispose of the deceased's dwelling, any capital gain or capital loss made on the disposal of the deceased's dwelling cannot be disregarded.

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