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Edited version of your written advice
Authorisation Number: 1051198217034
Date of advice: 7 March 2017
Ruling
Subject: CGT - deceased estate -discretion to extend the two year period - main residence
Question
Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the sale of a dwelling on the property and allow an extension of time until DDMMYY?
Answer
Yes.
This ruling applies for the following period
Year ending 30 June 2017.
The scheme commences on
1 July 2016
Relevant facts and circumstances
● The application for private ruling letter
● Copy of the contested Will
● Supreme Court of Australia - Decree Proving Will in Solemn dated 2016
● Copy of the contract for sale
The deceased acquired a dwelling in 199X
The deceased passed away in 201X
The dwelling was the main residence of the deceased
The deceased left a Will.
Legal proceedings were commenced in the Supreme Court of South Australia in 201Y regarding the validity of the Will.
A contract for sale was executed in 201Z subject to probate.
The Supreme Court of South Australia granted probate in 20ZZ.
Settlement occurred in 20ZZ.
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) and
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.
● All reasonable steps have been 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.