Edited version of your written advice

Authorisation Number: 1012845937504

Date of advice: 23 July 2015

Ruling

Subject: Capital gains tax - deceased estate - request to extend the two year period to dispose of an inherited dwelling.

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?

Answer

No.

This ruling applies for the following period

Income year ended 30 June 2014.

The scheme commences on

1 July 2013.

Relevant facts and circumstances

The deceased purchased a dwelling (the dwelling) before 20 September 1985, in which they resided continuously until they passed away.

The deceased accumulated extensive stamp and coin collections (the collections) over many decades, which was not catalogued. The stamps and coins were stored in numerous containers, and ranged in condition from poor to very good.

The deceased passed away after 20 September 1985.

The Trustees of the deceased's will are Trustee A, who resides in the state where the deceased's dwelling is located, and Trustee B who resides in another state.

After the deceased passed away, the Trustees identified the various containers housing the collections at the deceased's vacant dwelling and had removed them for safe keeping at Trustee A's residence.

The Trustees and family were reluctant to risk the collections by allowing them to go off-site without a comprehensive record of content of the collections.

A number of reputable dealers had been approached; however they were not prepared, or interested, in expending the time or resources necessary to do a credible estimate of the collections value.

A family member attended a show (the show) specifically for the items contained in the collections around two years after the deceased had passed away and they had approached a number of dealers at the show in relation to the valuing of the collections. However, none were interested in examining the collections due to their size and complexity.

While at the show, the family member had approached a representative from a firm (Firm A) located in another state who had agreed to do a private valuation. Firm A's representative had been transported to and from the location of the collections after spending a period of time reviewing the collections.

Firm A's representative provided an informal oral guestimate of valuation for the collections.

The valuation was revised by the representative, with the valuations changing.

Firm A's representative had advised that it would take Firm A a number of weeks to catalogue the collections.

The Trustees were not satisfied that the estimates provided by Firm A's representative for the collections were sufficiently robust for the Probate Application lodgement. It was viewed that the guestimate appeared to be unrealistically low given the size of the collections, combined with an absence of documentary evidence, such as an inventory of items to support such a figure in a Probate Application. This had been compounded by the inability of the Trustees to obtain an expert assessment from at least one other authority in stamp and coin collections.

A decision had been made by the Trustees that the only practicable way to get a realistic credible value was to finalise the family's inventory of the collections and securely transport them to Firm A to be auctioned.

Firm A had a number of auctions scheduled around that period.

The collections were transported to Firm A around 28 months after the deceased had passed away for expert valuation and cataloguing of the collections.

Firm A provided a final report on the valuation of the collections around six months later.

The collections were auctioned, with a significant number of items being deemed unsuitable for auction due to their poor condition occurring from inappropriate storage over many years.

You submit that a reasonable estimate could not be ascertained from public domain sources, because the Trustees do not possess the necessary skills or expertise to undertake such a valuation. Dealers had made it clear that the family would not be well placed to do a credible assessment.

The Trustees had not engaged any legal representation in relation to the administering of the deceased's estate but had sought legal guidance from time to time from a volunteer organisation and taxation accountants.

The Trustees used the services of the volunteer organisation to examine and discuss the Probate Application prior to its lodgement. Oral guidance had also been sought from the volunteer organisation at various times in relation to a variety of issues during the administration of the deceased's estate.

Difficulties had been experienced when organising an appointment with the volunteer organisation to have the Probate documentation checked, so that it could be lodged with the Supreme Court. The volunteer organisation only accepted bookings within a specific timeframe window and it was challenging for Trustee B when travelling interstate to co-ordinate flights and absences, particularly over holiday periods.

An appointment had been made with the volunteer organisation around 37 months after the deceased had passed away, which had to be cancelled.

Another appointment had been made with the volunteer organisation the following month.

Probate had been lodged with the Supreme Court more than 36 months after the deceased had passed away.

Probate on the deceased's estate was granted around eight weeks later.

The dwelling was rented out during the period of the estate's administration so that the dwelling could be insured. Once probate was granted, the tenant was given written notification to vacate the dwelling.

The tenant expressed that they wanted to purchase the dwelling and a sale price was agreed upon after some negotiation, on the condition that the tenant could obtain financial institution approval to purchase the dwelling.

The tenant's financial approval had taken some time, with the Trustees agreeing to a number of time extensions.

Settlement on the disposal of the dwelling occurred around six months after probate had been granted.

Due to Trustee A's ongoing health and personal issues, Trustee B had to assume the majority in administering the deceased's estate.

You submit that major delays in the preliminary work of the valuation of the collections, being a necessary requirement for lodging Probate, had occurred due to the distance Trustee B had to travel between their home interstate and the location of the deceased's estate.

Trustee A had experienced ongoing health issues after returning from an overseas trip taken during the following year after the deceased passed away. They had ongoing health issues for around two years.

Due to their medical condition, Trustee B had sought appraisals from medical practitioners who had recommended that Trustee B limit their air travel.

Trustee B undertook a number of trips primarily in relation to the administration of the deceased's estate, and some travel for personal reasons which had included activities relating to the administering of the deceased's estate, for the period commencing around the time the deceased passed away until around 39 months after the deceased had passed away.

You submit that due to Trustee A's health issues, the cataloguing of the collections took a number of years.

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 118-160

Income Tax Assessment Act 1997 Section 118-165

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

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.

In 1986, an explanatory memorandum was released which introduced 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 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 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

• 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 subsections 118-195(1) and 118-200(3) will depend on the facts of each case.

Other factors which may be relevant include but are not limited to:

• the sensitivity of personal circumstances of the beneficiary and other surviving relatives of the deceased; and

• the degree of difficulty in locating the beneficiary to prove the will.

The relevance and weight to be given to each of the factors described above will depend upon the circumstances of each particular case.

Examples of reasons considered not to be acceptable for exercising the Commissioner's discretion may include:

• waiting for the property market to pick up before selling the house,

• delay due to refurbishment of the house to improve the sale price,

• inconvenience on the part of the trustee or beneficiary to organise the sale of the house, or

• unexplained periods of inactivity by the executor in attending to the administration of the estate.

It is considered that the trustee has a choice in the situations described above. Accordingly, the Commissioner would not exercise the discretion under those circumstances.

Application of the Commissioner's discretion 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.

When making our decision we have taken the following into consideration:

• we accept that the Trustees of the deceased's estate had both experienced health issues while they were undertaking the administration of the estate. However, the Trustees could have appointed legal representatives to act on their behalf to undertake work in relation to the preparation of the Probate Application to expedite the administration of the deceased estate if their health issues delayed this process.

Alternatively, if the Trustees no longer wanted to act in that role, a substitute executor named in the deceased's will could have been appointed as Trustee, or they could have applied to the court to appoint an administrator if no substitute executor was named in the deceased's will.

It was both of the Trustee's choice to continue in their role as Trustees of the deceased's estate even though they were both experiencing health issues.

• it is submitted that the travel that Trustee B had to undertake in relation to their duties as Trustee of the deceased's estate had contributed to the delay in them being able to undertake activities related to the finalisation of the administration of the estate.

However, the distance Trustee B had to travel from their home to the location of the deceased's estate was known at the time the deceased passed away. It therefore would have been known that this would potentially present issues in finalising the estate. Given this, it would not have been unreasonable for Trustee B to have considered not accepting the responsibility of acting as the trustee of the deceased's estate, but they had made the choice to continue in that role despite the travel they needed to undertake in relation to the administration of the estate

• while the collections had been of a significant size, the deceased's estate is not viewed as being 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

• you have submitted that the delay in the administration of the deceased's estate had been due to the Trustees not being able to have the collection valued for the following reasons:

• the Trustees and beneficiaries were not prepared to allow the collections to leave the premises for estimation without a comprehensive record of the items included in the collections

• the difficulty in finding someone to value the collections; and

• the Trustees were not satisfied with guestimate provided by the Firm A representative because it was viewed by the Trustees as being unsatisfactory and unrealistically low given the size of the collections.

It is a requirement for Trustees of a deceased estate to lodge a statement of assets and liabilities with the Court Registry when applying for the granting of probate. The assets need to be sufficiently particularised so as to be identifiable. However, it is not necessary to provide particular details for every item and they can be grouped under headings and given an estimated value.

The Trustees were provided with indicative figures for the collections from Firm A's representative, which they chose not to accept. As outlined above, for the purpose of obtaining Probate, only estimates need to be provided. Therefore, it is viewed that the delay in obtaining the value for the collections is not grounds for the Commissioner to exercise his discretion to extend the two year period to dispose of the inherited dwelling.

Also, as outlined above, for the purposes of lodging the probate the items included in the collections could have been grouped together under headings and given an estimated value. It was not a requirement for each item in the collections to be identified for the application for probate to be lodged.

• a family member had attended the show around two years after the deceased had passed away. While the Trustees had approached numerous parties to value the collections, given that the show is held annually, it would be viewed as being reasonable that the Trustees could have sought assistance in relation to the valuation of the collections at an earlier show prior to the show the family member had attended; and

• the settlement on the disposal of the deceased's dwelling did not occur until around 46 months after the deceased passed away.

After considering the facts of this situation, while we accept that the Trustees had health issues, it is viewed that the delay in the administration of the deceased's estate was contributed mainly by the choices made by the Trustees of the deceased's estate and the family of the deceased.

Therefore, 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 your situation are not of a nature that would be acceptable for the exercising of the Commissioner's discretion.

Further issues for you to consider

The following information is provided as written guidance. A taxpayer who relies on guidance will remain liable for any tax shortfall if the guidance is incorrect or misleading and they make a mistake as a result (unless a time limit imposed by the law precludes the liability). However, they will be protected against the shortfall penalty and interest on the tax shortfall provided they relied on that guidance reasonably and in good faith.

In accordance with section 118-200 of the ITAA, a partial exemption of the capital gain or capital loss made on the disposal of an ownership interest in a dwelling that passed to an individual as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate and section 118-195 of the ITAA 1997 does not apply.

As the Commissioner has not exercised his discretion to extend the two year period to dispose of the property under section 118-195 of the ITAA 1997, the capital gain made on the property from the date the deceased passed away until the property is disposed of will be taxable.

As section 118-195 of the ITAA 1997 does not apply to your situation, you may be entitled to a partial exemption of the capital gain or capital loss made on the disposal of the property under section 118-200 of the ITAA 1997.