Edited version of your written advice

Authorisation Number: 1012977923249

Date of advice: 2 March 2016

Ruling

Subject: Capital Gains Tax - Deceased estates - 2 year 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 property?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2014.

The scheme commences on:

6 July 20XX

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 in 20XX.

The deceased owned the property, which had been acquired prior to 20 September 1985.

The last Will and Testament of the deceased appointed their spouse and son Child A as Executors.

The deceased's spouse had passed away before the deceased, as a result Child A was the sole executor (the Executor).

Under the will, the deceased bequeathed the property to you, with the residuary of the estate to be distributed equally between the deceased's children, Child A, Child B, Child C, Child D and you.

The deceased had allowed a family friend to reside in the property prior to her/him passing away.

There was a degree of consternation amongst the family members as Child E was bequeathed the only property and the remaining estate split between all of the deceased's children.

It was "always known" that Child D would dispute the will and a "softly, softly" approach was taken by the Executor in obtaining probate and the transferring of the title of the property into your name. Probate on the deceased's estate was delayed due to the actions and ill health of the Executor.

Probate of the will was granted over a number of years after the deceased passed away.

The family friend had continued to reside in the property from the date the deceased passed away until the date the property was transferred into your name.

The title of the property was transferred into your name over a number of years after the deceased passed away.

From the date the title was transferred into your name until around the time the sale contract was entered into you allowed the family friend to continue to reside in the property. You had been reluctant to evict the family friend and as a result continued to charge the family friend a minimal monthly rental fee until they moved out of the property.

You received an interim distribution from the estate around 12 months after the title was transferred into your name.

Around two years after probate was granted a hearing for the passing of accounts of the estate was held in the Supreme Court and shortly after a notice to serve an objection was lodged by Child D.

During the following month orders were made by the court for the Executor to provide documents that formed part of the controversy surrounding the objection to the passing of the accounts.

You put the property on the market.

Over five years after the deceased passed away you received a conditional offer to purchase the property by Company A, however the sale did not proceed.

During the following month a further offer was made to purchase the property. You declined the offer as the figure was significantly below the market value. You made a counter offer to the potential purchaser however your offer was rejected.

During the same month Company A expressed interest outlining scenarios which included the purchase of the property and another property. This sale did not eventuate.

Further delays in finalising the administration of the deceased's estate were due to the ill health of the Executor.

The Executor of the estate passed away around six years after the deceased passed away.

Grant of Probate appointed Grandchild A and Child C as the replacement executors of the deceased's estate.

Additional information was gathered by the executors five - seven months after the replacement executors were appointed and an invitation was issued to Child D to withdraw their objection to the passing of accounts.

Over nine years after the deceased passed away you sold the property.

You left the organisation of your affairs to your accountant and you were not made aware of the two year limitation period within which to sell the property.

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 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.

In certain circumstances, section 118-195 of the 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/beneficiary within two years of the date of death.

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 Beneficiary 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:

• The administration of the deceased's estate was delayed due to the Executor's actions, ill health and "softly, softly" approach used by the Executor in relation to the finalisation of the estate and the transfer of the property into your name

• A replacement executor/s could have been appointed if the Executor was unable to attend to their duties as the Executor of the deceased's estate due to ill health

• The Commissioner expects an Executor to undertake their duties to ensure that the estate is administered within an appropriate period

• The Commissioner expects the executor of a deceased estate to make reasonable enquiries about matters that affect the administration of the estate and to act responsibly in relation to the taxation affairs of the deceased and of the estate

• You and the Executor 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

• You had allowed the family friend to continue to reside in the property and this was a choice you had made. The deceased's will had not contained any provisions for a life interest or life tenancy agreement

• 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 Executor of the deceased's estate, and you as a beneficiary of the deceased's estate

• There was no challenge to the deceased's will, while Child D had commenced legal action in regards to the passing of accounts, it had not commenced until around 13 months after the property title had been transferred into your name

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

• While offers with conditions were made and did not eventuate, you had refused an offer to purchase the property as you considered the figure was significantly below the market value. You made a counter claim which was rejected.

• As a result of your choices and actions, settlement on the disposal of the dwelling had not occurred until around five years after the title had been transferred into your name, being over nine years after the deceased had passed away.

Conclusion

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. The price expected to be raised by the sale of the property is not a relevant condition for the exercising of the Commissioner's discretion.

The delay in the administration of the deceased's estate has been contributed to by the actions, and choices of the Executor of the deceased's estate who could have undertaken other activities to ensure that the property had been transferred into your name in a more timely manner so that the property could have been sold within the two year period from the date the deceased passed away.

Probate had not been granted until over three years after the deceased had passed away. The Executors of a deceased estate have a duty to distribute the estate of the deceased estate subject to the administration as soon as possible. However, in this case the title of the property was not transferred into your name until around thirteen months after probate had been granted and over four years after the deceased had passed away.

Legal action undertaken by Child D in relation to the passing of the accounts had not occurred until over five years after the deceased had passed away and over one year after the title of the property had been transferred into your name.

You received an offer on the property over five years after the deceased passed away, however you had not accepted the offer as you had viewed that the offer was below the market value of the property. Waiting for the property market to pick up before selling an inherited property or waiting for a higher price will generally not be viewed as reasons for the Commissioner to exercise his discretion to extend the two year period to dispose of an inherited dwelling.

The property was sold over nine years after the deceased had passed away. The period you held the property before it was sold, was as a result of your choices and actions for the period from when the title transferred to your name and when the property was sold. This is viewed as a significant period of time to dispose of an inherited property after the deceased has passed away.

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 inherited property, any capital gain or capital loss made on the disposal of the deceased's inherited property cannot be disregarded.