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Ruling

Subject: CGT - Commissioner's discretion under section 118-195 of the Income Tax Assessment Act 1997

Question:

Will the Commissioner exercise his discretion and extend the two year time limit in which the Trustee could have disposed of the property for the purposes of section 118-195 of the Income Tax Assessment Act 1997.

Answer:

No.

This ruling applies for the following period:

1 July 2011 to 30 June 2012

The scheme commenced on:

1 July 2011.

Relevant facts and circumstances:

The executor's spouse (the deceased) acquired a residential property (the property) prior to
20 September 1985.

The deceased passed away after 20 September 1985.

The deceased's will nominated their spouse as executor and sole beneficiary of their estate.

The executor had been diagnosed with Dementia prior to the deceased's death and was incapable of administering the estate.

More than four years passed from the date of death before solicitors indicated an alternative administrator should be appointed because of the executor's incapacity to administer the estate.

The property was sold over five years after the deceased's date of death. Prior to the sale, the property was occupied rent free by a relative for a period of time from the date of death, and then rented out until the date of sale.

The date of sale was within less than 12 months from the date Letters of Administration appointing an alternative administrator for the Estate were granted.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 118-195

Tax Laws Amendment (2011 Measures No. 9) Act 2012

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. However, the Commissioner has the power under section 118-195 to extend this two year period.

The tax law provides no guidance on the circumstances in which the Commissioner might exercise his discretion to extend the two year disposal period available to trustees under section 118-195 of the ITAA 1997. However, both the Guide to capital gains tax 2011-12, and the Explanatory Memorandum (EM) to Tax Laws Amendment (2011 Measures No. 9) Bill 2011 (which later became Tax Laws Amendment (2011 Measures No. 9) Act 2012) and which introduced the amendment to section 118-195 of the ITAA 1997 providing for the Commissioner's discretion to extend the two year disposal period) both state that:

· the Commissioner would be expected to exercise this discretion in situations where a trustee is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period, and

· that in that in considering whether or not to exercise this discretion, the Commissioner is expected to consider the period the trustee held the ownership interest in the dwelling and whether and to what extent the dwelling is used to produce assessable income during the trustee's ownership of the dwelling.

In this case, the Commissioner has decided not to exercise his power to extend the two year period available to the executor to dispose of the property for the purposes of section 118-195 of the ITAA 1997.

The circumstances of this case are such that the executor's inability to deal with the estate cannot be described as unforseen, nor can they be said to have come about during the two year period following the deceased's death. In fact, the executor was diagnosed with dementia prior to the date of death and was recognised at the time of the deceased's death as being incapable of dealing with the estate because of the dementia.

In addition to the above, the period the executor was the owner of the property as trustee of the estate is considered excessive in this case because:

· More than four years passed before any steps toward appointing an alternative administrator were taken.

The property was sold within less than 12 months of the alternative administrator being appointed. Considering this, it is not unreasonable to assume that had action to appoint an alternative administrator been taken closer to the date of death, the property could have been disposed of much closer to the two year period allowed by section 118-195 of the ITAA 1997.

Prior to the sale, the property was occupied rent free by a relative for a period of time from the date of death, and then rented out until the date of sale.