Edited version of private advice

Authorisation Number: 1051809861473

Date of advice: 5 March 2021

Ruling

Subject: Deceased estate - two year extension

Question 1

Will the Commissioner exercise the discretion under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension of time so that the capital gain made on disposal of the dwelling can be disregarded?

Answer

Yes.

Question 2

Is the Commissioner able to extend the period that tax is payable at individual rates, with the benefit of the full tax-free threshold, under section 99 of the Income Tax Assessment Act 1936 (ITAA 1936) on income of the trust estate from 1 July 2015, being the period after the first three income years following the date of death of the deceased?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

Year ended 1 July 20XX

Relevant facts and circumstances

The deceased died intestate and no one was able to administer the estate.

The deceased acquired a dwelling prior to 1985.

The dwelling was the main residence of the deceased up until the date of death and remined vacant following the death.

More than two years after the date of death, a creditor of the deceased estate obtained an order under Part XI of the Bankruptcy Act 1966 (Bankruptcy Act) for the deceased estate to be administered under that part of the Act.

Part XI of the Bankruptcy Act contains provisions enabling the insolvent estates of deceased persons to be administered in bankruptcy.

The applicant for this private ruling was appointed trustee for the administration of the estate of the deceased under the Bankruptcy Act

As at the date of this private ruling application, a legal personal representative of the deceased estate had not yet been appointed.

The dwelling required renovation as its condition had deteriorated since the date of death.

Following the appointment, the trustee arranged for the dwelling to be renovated and it was listed for sale as soon as practicable after the renovation. The dwelling was subsequently sold.

The assets of the deceased estate also included interest earning term deposits with a bank.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 paragraph 99A(2)(c)

Income Tax Assessment Act 1997 section 118-195

Income Tax Rates Act 1986 section 12(6)

Income Tax Rates Act 1986 section 12(9)

Income Tax Rates Act 1986 section 14

Income Tax Rates Act 1986 schedule 10

Reasons for decision

Extension of two year period for disposal of the dwelling

For capital gains tax (CGT) purposes, the vesting of an individual's CGT assets in a trustee under the Bankruptcy Actis disregarded (section 106-30 of the ITAA 1997).

In these circumstances, the CGT provisions apply to an act done by a trustee in relation to an individual's CGT assets as if it had been done by the individual. This applies to acts of the Official Trustee in Bankruptcy or a registered trustee, a trustee under a personal insolvency agreement made under Part X of the Bankruptcy Act1966, or a trustee as a result of an arrangement with creditors under the Bankruptcy Act.

Section 118-195 of the ITAA 1997 provides that a capital gain or capital loss may be disregarded if you dispose of a dwelling, or your ownership interest in it, and it passed to you as an individual beneficiary of a deceased estate or you owned it as the trustee of a deceased estate.

For a dwelling acquired by the deceased before 20 September 1985, the availability of the exemption is dependent upon who occupied the dwelling after the date of the deceased's death, or whether the dwelling was disposed of within two years of the date of the deceased's death. The Commissioner has the discretion to extend the two year period.

Generally, a longer period may be allowed where the dwelling could not be sold and settled within two years of the deceased's death due to reasons beyond the control of the beneficiary or the trustee of the deceased estate that existed for a significant portion of the first two years.

Practical Compliance Guideline PCG 2019/5 outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to extend the two year period. One of these factors is where the complexity of the deceased estate delays the completion of administration of the estate.

In the current case, it is considered that the complexity of the estate prevented the administration of the estate from being completed within two years.

Therefore, the Commissioner will exercise the discretion to extend the two year period to dispose of the property to when settlement for the sale was completed.

Income tax rates applying to deceased estates

In certain circumstances, the income of a trust estate will be subject to tax under section 99A of the ITAA 1936, unless the Commissioner is of the opinion that it would be unreasonable for section 99A to apply in relation to that trust estate in relation to that year of income.

The Commissioner can determine if the application of section 99A is unreasonable on receipt of a private ruling application from the trustee of the estate.

One situation in which section 99A of the ITAA 1936 applies is when a trust estate is administered under Part XI of the Bankruptcy Act (paragraph 99A(2)(c) of the ITAA 1936).

The rate of tax payable under section 99A of the ITAA 1936 is 45% (section 12(9) of the Income Tax Rates Act 1986 (Rates Act))

Where section 99A of the ITAA 1936 does not apply to income of a trust estate, the income will be subject to tax under section 99 of the ITAA 1936.

Section 12(6) of the Rates Act provides that the rates of tax applying to the trustee of a deceased estate under section 99 of the ITAA 1936 are set out in section 14 and Schedule 10 of the Rates Act.

Where the deceased person died less than three years before the end of a particular year of income, the income of the estate is taxed at the general individual rates, with the benefit of the full tax-free threshold (Clause 1 of Part I of Schedule 10 of the Rates Act).

However, where the deceased person died three or more years before the end of a particular year of income, the income of the estate is taxed at the general individual rates, without the benefit of the tax-free threshold (Clause 2 of Part I of Schedule 10 of the Rates Act).

There is no provision in the legislation to extend the concessional period of three years, nor is there any discretion available to the Commissioner to extend this period.

In the current case, from the date of death of the deceased, tax at individual rates with the benefit of the full tax-free threshold applied for the first three income years following death. From the fourth year, the non-concessional rate of tax without the benefit of the tax-free threshold applied to the estate until the date the current trustee was appointed under the Bankruptcy Act. The income of the trust estate was subject to section 99A of the ITAA 1936 from that date.

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