Edited version of your written advice

Authorisation Number: 1012983609267

Date of advice: 21 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 your share of the inherited property?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2016

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The deceased owned the property which was acquired prior to 20 September 1985.

The property was the main residence of the deceased at the time they passed away.

Probate of the will was granted shortly after the deceased passed away.

Under the will, the deceased bequeathed an equal share of the property to each of the children - Child A, Child B, Child C and you.

The deceased requested you care for child B. This request was not mentioned or otherwise included in the will.

Child C requested their share of the estate shortly after the deceased passed away.

Child B continued to reside in the family home under your care and it was Child B's main residence until passing away.

Under Child B's will, you were bequeathed their share of the property.

The property was put on the market and sold over xx years after the deceased passed away.

The delay in selling the property was due to Child B residing in the home until they passed away.

Due to the circumstances you were not in a position to sell the home.

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

The capital gains provisions do not generally apply to the sale of a dwelling that was acquired before 20 September 1985. This exemption also applies if a pre-CGT dwelling is sold by the executor of the deceased's estate or a beneficiary shortly after the deceased passed away.

The original exemption period was 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 only 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 how long the trustee or beneficiary held the ownership interest in the dwelling and the extent to which the dwelling has been used for other purposes, such as:

• producing assessable income

• a main residence for a beneficiary or associates of the beneficiaries

• renovations or other activities designed to increase the sale price, or

• waiting for the property market to improve.

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 deceased passed away in Month 19XX and you were appointed the Executor.

• You as 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 Child B 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 beneficiaries of the deceased's estate

• 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

• As a result of choices and actions, disposal of the dwelling had not occurred until over 29 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's property.

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 your share on disposal of the deceased's inherited property cannot be disregarded.