Edited version of your written advice

Authorisation Number: 1013075533460

Date of advice: 22 August 2016

Ruling

Subject: Capital gains tax - deceased estate - Commissioner's discretion - 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 until settlement.

Answer

No.

This ruling applies for the following period

Year ended 30 June 2016.

The scheme commences on

1 July 2015.

Relevant facts

The arrangement that is subject of the private ruling is described below. This description is based on a number of documents. These documents form part of, and are to be read with this description.

The dwelling was purchased before 20 September 1985 by the spouse of the deceased.

The spouse of the deceased passed away after a period of time.

The title passes to their spouse as surviving joint tenant.

The deceased passed away.

The dwelling was the deceased's main residence for their entire ownership period.

The dwelling has not been used to produce assessable income.

The beneficiaries of the estate were the deceased's children, B and G.

The deceased left a Will.

B was appointed executor and trustee of the Will.

B and G were given equal shares as tenants in common of the dwelling, as per the instructions in the will.

B undertook minor repairs and prepared the house for sale.

G and their family moved into the dwelling in the subsequent month.

G expressed their intention to buy A's share of the dwelling upon moving in.

G did not pay rent.

G's occupation of the dwelling and their offer to buy became matters in dispute between G and B over the Estate.

B and G discussed the sale of the dwelling on numerous times over the subsequent years.

The property was valued retrospectively for the date of death and had at current market value.

B wrote to the legal representative of the estate, the solicitor, instructing them to apply for probate subject to confirmation from G.

Confirmation was not received from G so B did not apply for probate.

B was diagnosed with a medical condition.

Discussions recommenced with G and no solution was obtained.

It became apparent to B that G was not in a position to purchase the dwelling.

B instructed the solicitor to again apply for probate of the Estate.

B obtained probate of the Estate.

B corresponded with G asking if G wanted to buy the dwelling, if not it must be sold.

B wrote a letter of demand to G requiring their commitment to purchase B's interest in the House, and a deadline date was set.

The solicitor for the estate gave G, and G's spouse, a notice to vacate the house by a particular date on instructions from B.

B filed a suit for possession of the house in the relevant State, to obtain possession of the house for the estate.

Possession of the house was ordered by the relevant State in the favour of B.

Under the authority of the Sheriff and the Writ of Possession, G and their spouse were evicted from the house.

B restored the house to a saleable condition.

The house was sold by B on behalf of the estate at a public auction with settlement occurring soon after.

Following the sale G commenced proceedings against B, challenging the will of the deceased.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 subsection 118-195(1)

Explanatory memorandum to the Taxation Laws Amendment Bill (No.9) of 2011 (Cth)

Reasons for decision

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 property that passed to them in their capacity as trustee of a deceased estate.

In relation to properties acquired by a deceased person after 20 September 1985, but who passed away after that date, the property must:

• be the main residence of the deceased just before they passed away

• was not then being used for the *purpose of producing assessable income; and

• For the exemption to apply under section 118-195 of the ITAA 1997, the property needs to be disposed of by the trustee or the beneficiaries within two years of the date of death.

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 property to be eligible for the exemption. The intention behind this legislation was that the inherited property 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 property 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 property 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 property, 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 property 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 property 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 property.

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

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 Beneficiary 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 passed away and B was appointed Executor.

• B as Executor 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

• G moved into the property, rent free, with no sale contract in place. The deceased's will, did not contain any provisions for a life interest or life tenancy agreement.

• No steps were taken to remove G from the property within the 2 year exemption period.

• The delay in the disposal of the property was not due to any legal impediment, but as a result of the actions and choices of the beneficiaries of the deceased's estate

• The information and documentation provided does not support 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

• As a result of choices and actions, disposal of the dwelling had not occurred until over 17 years after the deceased had passed away.

• Your G did not choose to dispute the will until after the property had been sold.

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. The intention of the two year period is to allow the orderly and timely sale of deceased's property.

The delay in the disposal of the property was contributed to by the actions, choices, and inactivity of the beneficiaries of the deceased's estate. Activities could have been undertaken to ensure that the property had been disposed of within the two year period after the deceased had passed away.

While we acknowledge and appreciate the circumstances in relation to B's medical issues, these were well outside the exemption period.

The period of time from the date the deceased passed away until the property was sold was over 17 years. This is considered to be a significant period of time to dispose of an inherited property.

Based on the information and documentation provided with this private ruling 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 inherited property, any capital gain or capital loss made on your share on disposal of the deceased's inherited property cannot be disregarded.

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