Edited version of your written advice

Authorisation Number: 1012863229521

Date of advice: 24 August 2015

Ruling

Subject: Capital gains tax - deceased estate - Commissioner's 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 until XX July 2015?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2015.

The scheme commences on

1 July 2014.

Relevant facts and circumstances

The deceased acquired a dwelling prior to 19 September 1985.

The deceased passed away in 20XX.

The dwelling had been the deceased's main residence.

Probate was granted in 20YY.

The main beneficiaries of the estate are the deceased's children, child (A) and child (B)

Child A is the sole executor of the estate.

Child B was diagnosed with an aggressive and terminal medical condition in 200X.

Child B condition deteriorated and was admitted to hospital in 20YY and was subsequently transferred to palliative care and then a nursing home.

Child B passed away after a period of time.

Child A was involved in Child B day to day to care due to various work commitments and geographical location of other family members.

Child A relative (relative C), passed in 20YY.

Child A was involved in relative C's care and funeral arrangements.

In 20ZZ Child A's child had health complications which required hospitalisation.

Child A engaged the services of a vendor advocate in early 20ZZ who recommended that an amount be spent renovating the dwelling.

The works were organised to commence as soon as possible and required child A's input.

The works to the dwelling were completed after more than one year and the dwelling was listed for sale in 2015.

The dwelling sold and settled a short time later.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 118-130(3)

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 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 when making our decision:

• The Trustee of the deceased's estate was delayed for periods from attending to the administration of the estate due to personal circumstances that prevented them from attending solely to the estate.

• The Trustee had a choice to make in early 20ZZ (which was still within the two year period) to either renovate or sell the property. The trustee decided to renovate the dwelling on the recommendation of a vendor's advocate, which took more than one year to complete. The Commissioner's discretion is meant to be limited to situations where the owner is effectively prevented from selling the dwelling. The price expected to be raised by relying on advice in renovating the dwelling is not a relevant condition for the exercising of the Commissioner's discretion.

• The dwelling had not been put on the market until after the two year period had expired.

Based on the information provided, it is viewed that the delay in the disposal of the property is due to the choices made by the executor of the Estate.

CGT

The most common CGT event, CGT event A1, occurs when you dispose of an asset to another entity. The time of the event is when you enter into the contract for disposal of it, or if there is no contract when the change of ownership occurs.

If two or more people acquire a property asset together it can be either as tenants in common or as joint tenants.

If a tenant in common dies, their interest in the property is an asset of their deceased estate. This means it can be transferred only to a beneficiary of the estate to be disposed of (or otherwise dealt with) by the trustee/s of the estate.

Deceased estate - main residence

Special rules apply to the asset that was a deceased person's main residence. If you inherit a deceased person's dwelling, you may be exempt or partially exempt when a CGT event occurs to it.

Information on how CGT applies is available on our website - www.ato.gov.au.