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Edited version of your written advice
Authorisation Number: 1051305916199
Date of advice: 1 December 2017
Ruling
Subject: Capital Gains Tax- Deceased estate - 2 year discretion
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 your share of the inherited property?
Answer
No
This ruling applies for the following period:
Year ended 31 December 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
Your parents (Parent A & Parent B) acquired a property (the Property) prior to 20 September 1985 on which a dwelling was located.
Parent A passed away a number of years later
Sibling A commenced living with Parent B at the Property.
A short time later Parent B passed away.
The deceased bequeathed an equal share of the Property to each beneficiary as follows.
● Sibling A
● Sibling B
● You
The will did not grant any beneficiary the right to occupy the property.
The Property was the main residence of the deceased at the time they passed away.
The Property had not been used to produce income.
Sibling A continued to reside in the family home
A few months later probate was granted.
Over 3 years after the deceased passed away the Property was placed on the market for sale.
The delay in selling the property was due to the following reasons:
● Sibling A was suffering from extreme grief and not in a stable emotional state after the loss of parent A & B.
● Sibling A sought counselling but did not find it helpful
● Over 12 months later conversations commenced with Sibling A on the need to vacate the Property. Sibling A advised that they were being made redundant from the place of work.
● Your lawyer advised they could issue an eviction notice, however you did not consider taking legal action to have Sibling A forcibly removed.
● Early 2017 Sibling A commenced moving possessions out of the Property but kept returning to sleep.
● You didn’t consider going to court to have Sibling A removed as you thought by letting them stay at the Property they would eventually in their own time move out.
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 dwelling
The capital gains provisions do not generally apply to the sale of a dwelling that was acquired before 20 September 1985. This exemption also applies if a pre-CGT dwelling is sold by the executor of the deceased’s estate or a beneficiary shortly after the deceased passed away.
The original exemption period was 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.
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 only 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 how long the trustee or beneficiary held the ownership interest in the dwelling and the extent to which the dwelling has been used for other purposes, such as:
● producing assessable income
● a main residence for a beneficiary or associates of the beneficiaries
● renovations or other activities designed to increase the sale price, or
● waiting for the property market to improve.
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:
● You had allowed Sibling A to continue to reside in the property and this was a choice you had made.
● The deceased’s will had not contained any provisions for a life interest or life tenancy agreement.
● You as a beneficiary 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.
● While there had been personal reasons not to sell, 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 deceased’s estate was not 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; and
● As a result of choices and actions, disposal of the dwelling had not occurred until over 3 years after the deceased had passed away.
Conclusion
After considering the facts of this situation, while we accept that there had been issues arising as a result of Sibling A’s personal circumstances, 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 a deceased property.
The period of time from the date the deceased passed away until the property was sold was over three years. This is considered to be a significant period of time to dispose of an inherited property.
Consequently, the Commissioner considers that there were no legal or physical impediments that prevented the disposal of the property within the two year period from the date the deceased passed away.
After taking into consideration the facts of your situation, the Commissioner has determined that he will not exercise his discretion to extend the two year period to dispose of your ownership interest in the property.
As the Commissioner has not exercised his discretion to extend the two year period to dispose of the deceased’s property, any capital gain or capital loss made on the disposal of your ownership interest in the property cannot be disregarded.
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