Edited version of your written advice

Authorisation Number: 1012903150349

Date of advice: 5 November 2015

Ruling

Subject: Capital gains tax - deceased estate - Commissioner's discretion

Question 1

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 the inherited dwelling?

Answer

No.

This ruling applies for the following period:

30 June 2016.

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

The deceased resided at the dwelling for a period commencing before 20 September 1985.

The dwelling was registered in the deceased's name before 20 September 1985, after their spouse had passed away.

The deceased's last will and testament named their children, Child A and Child B, as the Joint Executors of the deceased's estate, or the survivor of them to be the Trustee of the deceased's estate.

Under the will, the deceased bequeathed the residue of their estate to their beneficiaries in equal shares as follows:

• Child A

• Child B

• Child C; and

• Child D

• And

• If any of their children predeceased them, their children would inherit as tenants in common in equal shares their parent's share in the deceased estate, being 25%, when they reached 21 years of age.

Child C moved into the dwelling to assist the deceased.

Child A and Child B passed away a number of years before the deceased passed away.

The deceased continued to reside in the dwelling until they passed away many years after 20 September 1985.

The dwelling had not been used to produce assessable income during the deceased's ownership period.

Child C continued to reside in the dwelling after the deceased had passed away in order to keep it maintained for sale once probate had been granted.

The deceased's will was examined after the deceased had passed away, when it was determined that the executors named in the deceased's will had predeceased the deceased, leaving the will with no replacement executor/s.

For the period of around 15 months after the deceased had passed away, the deceased's family had been trying to resolve this matter.

The services of a lawyer had been engaged by the family to make an application to the court to appoint an executor so that probate could be granted around 15 months after the deceased had passed away.

The court formally appointed replacement executors (the Trustees), being Child A and Relative D.

The bank refused to supply the title of the dwelling until Probate on the estate had issued.

Probate on the deceased's estate was granted around X months after the deceased had passed away.

The bank did not supply the title of the dwelling until around six months after probate had been granted.

The holiday period was not a good time to engage tradesmen to undertake work on the dwelling, so work was completed on the dwelling to get it presentable for sale during the month after the holiday period. The work included the installation of a new hot water system, garden work and interior repairs.

The dwelling was put on the market around Y months after the deceased had passed away once the dwelling was suitable for sale.

A contract for the disposal of the dwelling was entered into around two months after it had been put on the market, with settlement occurring over three years after the deceased had passed away.

The following statements have been made:

• After the initial grieving period, Child C had started to contact the other beneficiaries as follows:

• Child B's children, who were estranged from the family and living in two other states, of which Child C did not have any contact details

• Child A's children, who were also estranged from the family and resided overseas. Child C did not have any contact details and had an extensive search for them; and

• Child D.

• Once Child C had located the beneficiaries, Child B's children had not responded with any advice, while Child A's children had not agreed with the proposal that Child C had suggested.

• As a result, advice had been sought from the Public Trustees Office which had been that they should use the same Executor that had been used in relation to the administration of the Estate of the deceased's spouse. On investigating this option it became apparent that the deceased's spouse had died intestate, and this option was therefore not available. After identifying this fact, Child A's children had refused to work amicably on replacing the executor and had refused to offer any financial contribution to the appointment of lawyers.

• At the time it was determined that the services of a lawyer should be engaged, Child C did not have enough earnings to cover the legal costs and Child D was in severe financial difficulty and could not contribute to the costs of appointing a lawyer. All other parties refused to contribute funds to assist with costs of appointing a lawyer or with the costs of maintaining the dwelling which had left Child C as the sole financial contributor to funding the costs of the deceased's estate.

• During this time Child C had obtained cost estimates from lawyers for the work required and had commenced saving towards paying those costs. The lawyers were engaged when Child C had sufficient funds to engage the lawyers to work on the deceased's estate

• Child C was both financially and emotionally under a large amount of financial and estate driven stress due to family estrangement issues

• The impact of following general advice provided by the Public Trustees compounded the delay in appointing a lawyer and Child C had not identified that a lawyer needed to be engaged until around X months had passed

• The main issue that caused the delay in disposing of the dwelling was due to the bank not releasing the title of the dwelling until probate had been granted. The title certificate had been supplied by the bank around late 20XX and the dwelling had been placed on the market in 20YY, under eight weeks from having the title being made available to the Trustees

• The administration of the deceased's estate from the time the deceased passed away was expected to be handled by Child C, with little or no assistance, either financial or otherwise. Child C could only do what they were capable of doing at the time. There was also the difficulty of trying to locate several of the beneficiaries, and some of the beneficiaries had insisted on having two executors as they did not want Child C to be the sole executor; and

• Child C had been advised that if they had applied for a replacement title that they would have to say that the bank had the title on the statutory declaration that accompanies an Application for a New Title and that they would not have replaced the title but would have insisted that they retry the bank which would have delayed retrieving the title even longer.

You have provided copies of a number of documents, which should be read in conjunction with and forms part of the scheme of this private ruling.

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

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 capital gains tax (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 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 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 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 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 Trustee 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:

• some members of the deceased's family were estranged and issues had arisen in relation to contacting members of the deceased's family and agreeing on how to proceed with administering the deceased's estate

• some of the deceased's family members had refused to work amicably on replacing the executor of the deceased's estate

• general advice had been sought from the Public Trustees which had been followed until it had been established that a lawyer needed to be engaged to administer the deceased's estate

• Child C did not have sufficient funds to cover the legal costs, with all other parties refusing to contribute any funds to appoint a legal representative, or maintaining the dwelling, which left Child C as the sole financial contributor to funding the costs of the deceased's estate

• Child C had sought cost estimates for the administration of the deceased's estate and had saved until they had enough funds to engage the services of a legal representative

• In an Australian state, beneficiaries can apply to the Supreme Court as early as two months after the date of death for the courts to appoint replacement executor/s.

• The bank had not provided the title of the deceased's dwelling until late 20XX

• We have not been advised that there was any legal challenge to the appointing of the replacement executors

• The services of the lawyer were engaged in 20YY, to lodge an application with the Supreme Court to appoint a replacement executor/s, which was more than 12 months after the deceased had passed away

• The two year period after the deceased had passed away had passed by the time that the replacement executors were appointed

• Settlement on the disposal of the dwelling occurred in 20ZZ, thirteen months later after probate had been granted and over three years after the deceased passed away

• The information and documentation provided does not support that the deceased's estate was of a complex nature

• The Commissioner would expect that affected beneficiaries would act promptly to ensure that the affairs of the estate were being administered appropriately

• The Trustees should have been aware that there were conditions that had to be met if the sale of the property was to be exempt from the capital gains provisions; and

• The Trustees 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.

Conclusion:

After considering the facts of this situation, while we accept that there had been some issues with the relationships between family members, mere disagreements amongst family members is not viewed as a reason for the Commissioner to exercise his discretion to extend the two year period to dispose of an inherited dwelling.

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 delay in the administration of the deceased's estate has been contributed to by the actions, and inactivity, of the beneficiaries and Trustees of the deceased's estate who could have undertaken other activities to ensure that the dwelling had been disposed of within the two year period after the deceased had passed away.

Nobody commenced any of the proceedings required to obtain probate of the estate within a reasonable period of time.

The first stage of obtaining probate of the estate did not occur until around 14 months after the deceased passed away.

There was a further 11 month period of time until probate on the estate was sought and obtained.

The Australian state law would allow proceedings to commence in relation to the replacement of the executors two months after the deceased had passed away.

We accept that there had been issues with family members however any of the beneficiaries could have independently applied to the Supreme Court to be appointed as the replacement executor two months after the deceased had passed away.

You have stated that it was expected that Child C would handle the administration of the deceased's estate with little or no assistance. Therefore, they could have commenced obtaining probate without any input from the other beneficiaries. However, several of the other beneficiaries had insisted on having two executors. Regardless of who had been administering the estate, no actions had been undertaken by anyone to have new Trustees appointed for a lengthy period of time, with a lawyer not being engaged until 15 months after the deceased passed away.

Once the Trustees had been appointed, they had choices as to how to proceed with the administering of the deceased's estate and the disposal of the dwelling to dispose of the dwelling within the two year period to be able to disregard any capital gain made on the disposal of the dwelling.

We have not been advised of the reason it had taken so long for probate to be granted or what activities the Trustees had undertaken from the time the lawyer was engaged until probate was granted.

It is viewed that the period of time it took for probate to be granted and for the dwelling to be disposed of is quite a lengthy period of time.

Based on the information provided 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 this situation are not of a nature that would be acceptable for the exercising of the Commissioner's discretion.

As the Commissioner has not exercised his discretion to extend the two year period to dispose of the deceased's dwelling, any capital gain or capital loss made on the disposal of the deceased's dwelling cannot be disregarded.