Edited version of your written advice

Authorisation Number: 1051188973181

Date of advice: 17 February 2017

Ruling

Subject: Capital gains tax - deceased estate -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 until settlement?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2016.

The scheme commences on

1 July 2015.

Relevant facts and circumstances

The relevant documents are:

● The application for private ruling

● Death Certificated

● Copy of the contested Will

● Copy of Will

● Supreme Court - Summons and Statement of claim

● Supreme Court - Defence and Cross-Action

● Supreme Court - Judgement

● Supreme Court - Decree Proving Will in Solemn

● Contract for Sale of the main

● Settlement statement of the main residence

The taxpayer passed away in 20AA (the deceased).

The dwelling was the main residence of the deceased.

The deceased left two Wills.

The Will dated 195X (Will 1) provides the entire estate to the beneficiary.

The Will dated 200X (Will 2) did not provide the estate solely to the beneficiary.

Discussions between the beneficiaries of the Will (2) occurred in 20AA and ceased in 20BB

Legal proceeding where commenced in the Supreme Court of the relevant State in 20BB regarding the validity of two Wills.

Mediation between the disputing parties occurred in 20CC

The Supreme Court of the relevant State issued judgement in 20DD against the validity of the Will

Probate was granted in 20DD

A contract for the sale of the dwelling was executed in 20DD

Settlement occurred in 20DD

The dwelling has not been used to produce assessable income.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 118-130(3)

Income Tax Assessment Act 1997 section 118-195

Explanatory memorandum to the Taxation Laws Amendment Bill (No.9) of 2011 (Cth)

Reasons for decision

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 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:

● Due to a legal challenge of the deceased's Will, it was not possible to sell the property until probate was granted.

● You have taken all reasonable steps to sell the property as soon as practically possible after probate was granted.

Conclusion:

After considering the facts of your situation, we accept that there were circumstances arising as a result of legal challenges and that these challenges prevented you from disposing 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 exercise his discretion to extend the two year period to dispose of your ownership interest in the property.