Edited version of your written advice

Authorisation Number: 1012907701106

Date of advice: 10 November 2015

Ruling

Subject: Commissioners discretion to extend the two year period

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 to dispose of the inherited properties?

Answer:

No.

This ruling applies for the following period:

Income year ending 30 June 2015.

The scheme commences on:

1 July 2013.

Relevant facts and circumstances

The arrangement that is subject of the private ruling is described below. This description is based on the documents provided with the private ruling and those documents form part of, and are to be read with this description.

The deceased passed away after 20 September 1985.

At the time the deceased passed away, they owned the following properties which had been acquired by them prior to 20 September 1985:

• Property A

• Property B,

• Property C.

One of the deceased's children, had moved into Property C prior to the deceased passing away to care for the deceased and had continued to reside there after the deceased had passed away.

The deceased passed away intestate.

The deceased was survived by his/her children, Child A, Child B, Child C and Child D.

Three of the children (the plaintiffs) made an application to the Supreme Court of X over three years after the deceased passed away for the settlement of the deceased's estate. The defendants included a child of the deceased and other members of the deceased's family.

The Supreme Court action was commenced to pronounce against the force and validity of an apparent Will (the script) that a child of the deceased had in their possession.

An affidavit had been provided by the defendant in relation to a counterclaim in which the defendant had submitted that the script was the deceased's last will and testament.

The real property of the deceased's estate was valued around nearly four years after the deceased had passed away.

The parties attended several failed Settlement Conferences and a Mediation session.

On the morning of the hearing, over five years after the deceased had passed away, A child of the deceased made an offer to the plaintiffs that they would be entitled to the entirety of the assets of the deceased's estate on the condition that they receive a specified sum of money.

On the same day, the Terms of Compromise was settled between the parties which outlined the following:

• The script was found invalid

• The counterclaim lodged by the defendant was dismissed

• The deceased had died intestate

• A child would receive a specified sum of money

• A child would obtain a grant of Letters of Administration for the deceased estate and would be the Trustee of the deceased's estate

• Upon the granting of letters, the Trustee would:

• Permit a child to continue to reside in Property C rent free for a specified period of time after the date of administration is granted

• List Property C on the market within a specified period of time after administration being granted

• Pay the specified sum from the proceeds on the disposal of the Property C to a child of the deceased within a specified period after the settlement of the property occurred

• Pay all costs of the administration of the deceased's estate, including funeral and testamentary expenses

• Pay from the deceased estate, the legal costs of the plaintiffs in relation to the proceedings concerning the script; and

• Attend to the administration of the remaining assets of the deceased's estate, pay all estate debts and hold the residue of the estate upon trust for the plaintiffs in equal shares.

On the same day the Terms of Compromise were made a Rule of Court by Order in the Supreme Court.

Letters of Administration of the deceased's estate were granted by the Supreme Court around three months later and a child of the deceased was appointed as the Trustee of the deceased's estate.

Settlement on Property B occurred over five years after the deceased had passed away.

Settlement on the disposal of Property A was due to occur around 12 months after the Letters of Administration had been granted. However, a child of the deceased lodged a caveat at the Lands Titles Office on the morning of settlement claiming to be beneficially entitled to a share in the estate and interest in fee simple over the property by virtue of the Terms of Compromise.

Settlement on the disposal of Property A occurred over six years after the deceased had passed away.

Settlement on the disposal of Property C occurred over seven years after the deceased had passed away.

The Trustee has made an additional application to the Supreme Court in relation to the obligation of the deceased's estate to pay a child of the deceased the specified sum of money from the sale of Property C, pursuant to the Terms of Compromise. Child B provided a sworn affidavit in relation to this application.

The following statements have been made in the private ruling:

• The Administrator (Trustee) of the deceased's estate was physically prevented from being able to perform their duties as Administrator from other members of the deceased's family, who physically prevented his/her access to the majority of the real estate assets of the deceased. This restriction on access occurred during the intervening period from the date the deceased passed away until the date the Letters of Administration were granted

• The Trustee had lodged an application to be granted access to the assets of the deceased's estate over three years after the deceased had passed away, in order to carry out and perform their Trustee's duties. The application was heard around two years later with the Letters of Administration being granted around three months later

• The properties were sold within two years of the Letters of Administration being granted

• As the properties had been acquired by the deceased prior to 20 September 1985, the deceased would have generally been entitled to disregard the capital gain arising from the disposal of those properties if the capital gains tax event had occurred in relation to these assets immediately prior to the deceased passing away

• Had the Trustee of the deceased's estate been able to administer from the date of death it is assumed that , without restriction, that the properties would have been administered within two years from the date the deceased passed away

• Given the factors that restricted the Trustee from performing their duties were outside of their control, the argument is that the Commissioner's discretion to extend the two year period from the date the Letters of Administration had been granted; and

• All of the pre-CGT assets were administered within two years from the date the Letters of Administration had been granted.

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 property

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 properties for the purposes of section 118-195 of the ITAA 1997.

We have taken the following into consideration when making our decision:

• The deceased had passed away intestate

• A number of the deceased's children had applied for the Letters of Administration and one of the beneficiaries had made a counterclaim to the deceased's estate

• The Letters of Administration were granted over five years after the deceased had passed away

• Settlement on the disposal of the properties occurred within 25 months of the Letters of Administration being granted

• The two year period after the deceased's date of death had passed by the time the application to the Supreme Court had been made

• The settlement on the disposal of Property A and Property C had occurred over six years after the deceased had passed away

• No explanation has been provided for the gap in the period from when the deceased had passed away until the application had been lodged with the Supreme Court

• No evidence has been provided to support that there were any impediments for any of the beneficiaries obtaining the Letters of Administration within the two year period

• No information has been provided to support that Child A had attempted to obtain Probate based on the script, or that they had undertaken any action/s that had prevented any of the beneficiaries from lodging the application for the Letters of Administration with the Supreme Court; and

• While the properties had been pre-CGT assets in the hands of the deceased, under the CGT provisions they are viewed as having been acquired by the Trustee and/or the beneficiaries on the date the deceased passed away. Therefore, in this case the properties are viewed as having been acquired on the date that the deceased passed away, which is after 20 September 1985, and their pre CGT status in the hands of the deceased no longer applies.

Conclusion:

When a person dies without a will in X, the provisions of the Administration and Probate Act 1919 (X) determines who are the persons (or person) who can administer the Estate and how the Estate is to be divided.  That person or persons must then apply to the Probate Registry of the Supreme Court of X for a Grant of Letters of Administration.

Letters of administration can be granted 28 days after the death of the deceased in X, and earlier with express permission of the Court or Registrar.

In this case, we have not been advised that any of the beneficiaries had commenced any of the proceedings required to obtaining the Letters of Administration within a reasonable period of time.

The first stage of obtaining the Letters of Administration did not occur until over three years after the deceased had passed away. At this point, the two year period to dispose of the inherited properties to be able to disregard any capital gain or capital loss made on the disposal of the properties had already passed.

It has been stated that the Trustee of the deceased's estate had been physically prevented from performing their duties by members of the deceased's family from the date the deceased passed away until the Letters of Administration had been granted. However, no one had been appointed as the Trustee/s of the deceased's estate and therefore did not have the power to act in that role until the Letters of Administration had been granted, when a child of the deceased had been appointed as the Trustee of the deceased's estate. Until then, none of the beneficiaries had the right to administer the deceased's estate.

We accept that there may have been issues with the deceased's family members, however any of the beneficiaries could have independently applied to the Supreme Court to be granted the Letters of Administration and be appointed as the Trustee of the deceased's estate after 28 days had passed from the deceased's date of death. However, based on the information and documentation provided, no one had applied for the granting of the Letters of Administration until over three years after the date the deceased had passed away.

We have not been provided with any explanation for the delay in applying for the Letters of Administration, or what if any actions any of the beneficiaries had undertaken to finalising the administration of the deceased's estate. Therefore, we do not know what had caused the delay in applying for the Letters of Administration for over three years after the deceased had passed away.

The Commissioner can only provide a private ruling decision based on the facts of the situation being addressed in the private ruling. A private ruling decision will not be made based on generalised information. In the letter provided by the legal firm, the writer has outlined how Court proceedings pertaining to issues similar to the one dealt with in this private ruling may operate. The writer has stated that their firm was not involved in the earlier proceedings and while the writer has made reference to a caveat being lodged, no information has been provided with this private ruling application to advise the Australian Taxation Office (ATO) that anyone had lodged a caveat in relation to the deceased's properties prior to the application being made to the Supreme Court, over three years after the deceased had passed away.

The writer has made the following statement in their letter:

From the date of death of the deceased until the grant of Letters of Administration no person had any authority to deal with or administer, in part or in full, the estate of the deceased. In effect the assets of the estate were frozen pending the outcome of the contentious Supreme Court proceedings.

We agree that no one had the authority to administer the deceased's estate until the Letters of Administration had been granted. However, we have not been advised of any "contentious Supreme Court proceedings" other than the Supreme Court proceeding after the application had been made by the plaintiffs three years after the deceased had passed away.

After a child of the deceased had been appointed as the Trustee of the deceased's estate, settlement on Property A had occurred 13 months later, and settlement on Property C had occurred 25 months later. However, we are looking at the whole period since the deceased passed away when determining whether the Commissioner will exercise his discretion to extend the two year period to dispose of an inherited dwelling. In this case, that period is from:

• The date the deceased passed away until settlement on the sale of Property A occurred, being a period of over six years; and

• The date the deceased passed away until settlement on the sale of Property C occurred, being a period of over seven years.

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 intention of the two year period is to allow the orderly and timely sale of deceased estate property.

In this case, while there had been a legal challenge it had covered less than half of the period from the date the deceased passed away. There is significant period for which no explanation has been provided for the delay, being from the date the deceased passed away the application was made to the Supreme Court.

No explanation has been provided for the delay in applying to the Supreme Court for an administrator to be appointed so that the Letters of Administration could be applied for.

Based on the information and documentation provided with this private ruling 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 properties, any capital gain or capital loss made on the disposal of the deceased's properties cannot be disregarded.

Note: The Commissioner's discretion to extend the two year period to dispose of an inherited property does not apply to the disposal of vacant blocks of land. Therefore, the normal capital gains tax provisions will apply to the disposal of Property B, the vacant block of land.