Edited version of your written advice

Authorisation Number: 1012921461867

Date of advice: 9 December 2015

Ruling

Subject: Capital gains tax - deceased estate -Commissioners 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 to dispose of the inherited property?

Answer:

No.

This ruling applies for the following period:

Income year ending 30 June 2015.

The scheme commences on:

11 July 2008.

Relevant facts and circumstances

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

Your parent (Parent A) and your relative (Relative A) jointly purchased the property (the property) after 20 September 1985, on which a dwelling was located.

Your sibling (Sibling A) commenced living with Parent A and Relative A, a number of years after it had been purchased, after 20 September 1985.

Parent A passed away a number of years later and their ownership interest in the property was bequeathed to Sibling A.

Relative A and Sibling A continued to live at the property until Relative A (the deceased) passed away a number of years later.

The deceased's ex-in-law and your parent (Parent B), was appointed as the Executor (Trustee) of the deceased's estate.

The deceased bequeathed their ownership interest in the property to their beneficiaries as follows:

• You and your other sibling (Sibling B) were bequeathed the same ownership interest in the property; and

• Sibling A was bequeathed a larger ownership interest in the property.

The Trustee had spoken to you and the other beneficiaries about selling the property and resettling Sibling A in a more suitable accommodation suitable for their circumstances and medical issue. You and the other beneficiaries all agreed to dispose of the deceased's property.

A number of months after the deceased had passed away, Sibling A organised a clean-up of the property.

Sibling B arranged to go to the property during the following month for another clean-up day. However, Sibling A asked Sibling B if they would delay selling the property until a later date, but Sibling A declined. During the conversation it was agreed that the clean-up would occur a number of days earlier than had originally been arranged.

A number of months after the deceased had passed away, Sibling A emailed the Trustee and a phone call had occurred between the two parties.

On the same day, Sibling A emailed the Trustee to advise that they refused to sell the property and had ceased making preparations for the sale of the property. The Trustee had responded and had sent a number of emails to Sibling A in which they had requested that Sibling A rethink their decision not to sell the property.

During the following week, Sibling A sent an email to the Trustee in which they expressed that nothing their family had communicated to them could convince them to sell the property and that their wish that they only be contacted in writing had been disrespected in many cases.

On the following day, the Trustee sent Sibling A an email in which outlined that the selling of the property would ensure that they had a smaller and easier to maintain home and that there had been money set aside to assist with their transition.

A number of days later, Sibling A was admitted into hospital and after their release had continued to be unwell. They were re-admitted to hospital during the following month, where they had stayed for around four months. Sibling A was diagnosed with a chronic medical condition around this time.

When Sibling A was released from hospital, you and the other beneficiaries had decided not to pursue the sale of the property.

The title of the property was transferred into the beneficiaries' names.

Sibling A continued to reside in the property rent free, paying for expenses related to the property, such as rates until around mid-20XX, when Sibling A indicated to their family that they were ready to sell the property.

The property was sold during the 20XX-YY income year.

Sibling A's circumstances

Sibling A had received treatment a number of years before they had moved into the property. Following that, they were referred to their General Practitioner (GP) and continued on medication as prescribed by their GP.

Sibling A had commenced living in the property a number of years after the property had been purchased by Parent A and the deceased, when previous housing options had failed.

Around four months after the deceased passed away, Sibling A advised the Trustee that they had relinquished a position that they were being trained for and they had been to a number of places for interviews and to drop off their resume.

Around a week later, Sibling A advised the Trustee that they had organised a clean-up of the property.

Around five months after the deceased passed away, Sibling A got some trial shifts undertaking a specified work type.

Around two weeks later, Sibling A telephoned the Trustee and advised that they had been retrenched.

During the following week, Sibling A advised the Trustee that they refused to sell the property.

Sibling A was admitted into hospital around eight months after the deceased had passed away. After they were released from hospital they continued to be unwell. Sibling A was re-admitted to hospital and hospitalised for a number of months. Sibling A was diagnosed with a chronic medical condition.

In 20ZZ, the Trustee with the help of Sibling A's doctor, had followed up a housing option for Sibling A, however Sibling A had refused to consider this option.

Sibling A continued to reside at the property until around the middle of 20XX when they had determined that they were ready to sell the property and move.

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 property that passed to them in their capacity as trustee of a deceased estate.

In relation to properties acquired by a deceased person after 20 September 1985, but who passed away after that date, the property must:

• be the main residence of the deceased just before they passed away

• was not then being used for the *purpose of producing assessable income; and

• for the exemption to apply under section 118-195 of the ITAA 1997, the property needs to be disposed of by the trustee or the beneficiaries 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 property to be eligible for the exemption. The intention behind this legislation was that the inherited property 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 property 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 property 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 property, 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 property 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 property 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 property.

In exercising the discretion the Commissioner will also take into account whether and to what extent the property is used to produce assessable income and for how long the trustee or beneficiary held the ownership interest in the property. 

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:

• Sibling A had resided in the property with Parent A and the deceased prior to them both passing away within a number of years of each other, with the deceased being the last to pass away

• Sibling A had inherited Parent A's ownership interest in the property, and an additional ownership interest in the property had been bequeathed to them by the deceased. You and Sibling B had each been bequeathed the same ownership interest in the property by the deceased

• All of the beneficiaries had originally agreed to dispose of the property after the deceased had passed away

• Around five months after the deceased had passed away, Sibling A advised that they did not want to sell the property

• Sibling A was hospitalised after the deceased had passed away and re-admitted around three months later. During this time they were diagnosed with a chronic medical condition

• After this, the family had decided not to pursue the sale of the property

• Sibling A continued to live in the property until they had agreed to sell the property in mid-20XX, with the property being sold a number of months later.

• While there had been personal reasons not to sell, there had been no legal impediment and it had been the choice of both the Trustee and the beneficiaries not to sell the property within the two year period from the date the deceased passed away

• You have not disclosed any personal issues, or personal circumstances, that prevented the Trustee from dealing with the estate

• The Trustee was not caring for Sibling A on a day to day basis during the two year period after the deceased passed away

• You, Sibling B and the Trustee 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 CGT provisions

• We would have expected that at the time the choice not to sell the property within the two year period had been made, that the Trustee, you and Sibling B would have realised that that choice would potentially render the exemption unavailable to you, and the consequences of that choice

• You, Sibling B and the Trustee should have been aware that the CGT provisions might apply if the sale of the property was delayed beyond two years from the date the deceased passed away

• While Sibling B had been bequeathed Parent A's ownership interest in the property, and an additional ownership interest in the property from Relative A, both the Trustee and/or you and Sibling B had options that you could pursue so that you could realise your inheritance, such as having the court appoint an agent to sell the property. However, the choice had been made not to undertake any action to dispose of the property, either legal or other actions

• The deceased's estate was not 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; and

• Settlement on the disposal of the property did not occur until over six years after the deceased passed away.

Conclusion:

After considering the facts of this situation, while we accept that there had been issues arising as a result of Sibling A's medical condition and their refusal to sell the property, 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 disposal of the property was contributed to by the actions, choices, and inactivity of Trustee of the deceased's estate and you and Sibling B in response to Sibling A's circumstances. Activities could have been undertaken to ensure that the property had been disposed of within the two year period after the deceased had passed away.

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

While we acknowledge and appreciate the circumstances in relation to Sibling A's medical issues, it was ultimately the decision of firstly the Trustee, and then you and Sibling B as the beneficiaries when the title of the property had been transferred into your names, to allow Sibling A to continue to reside in the property, and to not sell the property within the two year period after the deceased passed away.

The delay in the disposal of the property was not due to any legal impediment, but as a result of the actions and choices of the Trustee of the deceased's estate, and you and Sibling B as the beneficiaries of the deceased's estate.

Based on the info provided, there is no evidence to support that Sibling A's medical condition had hindered the Trustee's ability to administer the deceased's estate.

Since the deceased passed away, the Trustee has allowed the property to be used primarily as Sibling A's residence rather than organising to sell it in an orderly manner. You and Sibling B have also allowed this to happen.

The period of time from the date the deceased passed away until the property was sold was over six years. This is considered to be a significant period of time to dispose of an inherited property.

Consequently, the Commissioner considers that there were no legal or physical impediments that prevented the disposal of the property within the two year period from the date the deceased passed away.

After taking into consideration the facts of your situation, the Commissioner has determined that he will not exercise his discretion to extend the two year period to dispose of your ownership interest in the property.

As the Commissioner has not exercised his discretion to extend the two year period to dispose of the deceased's property, any capital gain or capital loss made on the disposal of your ownership interest in the property cannot be disregarded and must be included in your 20YY-AA income tax return.