Edited version of private advice

Authorisation Number: 1052152060521

Date of advice: 1 November 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question 1

Will the Commissioner exercise the discretion under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension of time for the trustee of the deceased estate (the trustee) to dispose of its ownership interest in the dwelling acquired from the beneficiary and disregard the capital gain or capital loss made on the disposal?

Answer

No.

Question 2

Does section 112-20 of the ITAA 1997 apply to modify the cost base of the property in the hands of the trustee to its market value when the trustee acquired the property in early 2021?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away some years ago.

The deceased solely owned a property (the property) which they purchased before 20 September 1985.

The property was the main residence of the deceased just before they passed away and was not used to produce assessable income at that time.

The deceased did not have an ownership interest in any other property.

The property was situated on less than two hectares of land.

The deceased left a Will dated in the mid -1990s which left the entire estate to their two adult children (child A and child B)

The Will appointed both of their adult children as executors of their estate.

The deceased was survived by their two adult children.

Child A is diagnosed with a health condition and a resulting disability. Child A's impairments have been quite prolonged but have become more of a critical matter since the passing of their parent.

Due to their disability, child A was unable to sign any documents and participate as a co-executor for the estate.

The probate was granted to Child B a couple of years later.

Child B has taken steps to transfer ownership of the property to Child A and themself; however, Child A was unable to undertake the necessary legal steps due to their medical condition.

Then, Child B as Legal Personal Representative (LPR) of the deceased estate was registered on the title as the sole proprietor.

Then, the property was transferred to Child B as a beneficiary, with Child B registered on the title as the sole proprietor.

A trustee (the trustee) was appointed as Child A's administrator pursuant to an administration order from a local Government authority about a year later.

Child A had been living with the deceased at the property, and then continued to live at the property after the deceased's death until then when they then moved to a rehabilitation centre, and then subsequently to a care facility.

The property has been left vacant ever since.

As Child A's administrator, the trustee made a testators family maintenance claim (the TFM claim) against the deceased's estate pursuant to Part IV of the Administration and Probate Act 1958 (VIC).

The parties subsequently agreed to settle Child A's claim upon the terms and conditions set out in the Deed of Settlement.

Pursuant to the Deed of Settlement, Child B was to administer the estate as follows:

A.    Fully administer the estate.

B.    The executor shall pay, and personally guarantee payment of, a specified amount from the deceased's residuary estate to Child A absolutely within 30 days of settlement of the sale of the property.

C.   The executor shall pay 50% of the net proceeds of sale of the property over and above the specified amount noted in point B to Child A.

After the TFM claim was settled, the trustee has liaised with Child B on several occasions regarding the sale of the property.

Then, Child B advised the trustee that they had appointed a real estate agent to manage the sale of the property.

Child B then advised the trustee that the property required work to bring it up to a minimum marketable standard, and that they were intending to clean out the interior of the property.

A further update provided the property contained substantial amount of asbestos and as a result, the sale of the property was placed on hold.

Child B advised the trustee that there was limited progress as their research into the asbestos issue revealed the resolution was time consuming and very expensive, and that they along with their spouse were suffering serious health problems which added to the delay.

The trustee then explored options to assist child B with administering the estate however was not successful.

The trustee's legal department advised child B that no further assistance would be provided and requested that they progress the sale of the property.

Next, child B was declared bankrupt, and an individual was appointed as their trustee in bankruptcy.

Child B and the trustee entered a Deed of Retirement and Appointment of Trustee. As a result, the same trustee that was appointment as Child A's administrator was also appointed as the trustee of the deceased estate.

Following the appointment, the trustee immediately commenced its process to prepare the property for sale.

However, efforts to clean the property and remove Child A's personal possessions were delayed by lockdowns and travel restrictions imposed by the local Government to combat the spread of COVID 19.

The trustee obtained an asbestos audit report detailing the extent of the issue prior to the sale of the property.

Then, the trustee registered as the sole proprietor of the property.

The property was listed for sale soon after COVID 19 related restrictions eased. The property was sold reasonably quickly, with settlement occurring a couple of months later.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 112-20

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

Question 1

Section 118-195of the Income Tax Assessment Act 1997 (ITAA 1997) disregards capital gains and capital losses made from certain CGT events that happen in relation to a dwelling that:

•         was a deceased person's main residence and was not being used to produce assessable income just before they died, or

•         was acquired by the deceased before 20 September 1985.

If you disposeof an ownership interest in a dwelling that passed to you as an individual beneficiary or as the trustee of the deceased's estate within 2 years of the deceased's death, any capital gain or loss you make on the disposal is disregarded. The Commissioner has the discretion to extend the 2-year period.

In your case, the deceased passed away some years ago, Child B transferred the property to them as the Legal Personal Representative (LPR) of the deceased estate, and then subsequently to themself as a beneficiary.

Later, child B and the trustee entered a Deed of Retirement and Appointment of Trustee. As a result, the same trustee that was appointment as Child A's administrator was also appointed as the trustee of the deceased estate. Following this, the trustee then acquired the dwelling from Child B.

Section 118-195 can only apply to a dwelling that devolved upon the deceased estate due to the death of the deceased. It is not available to a dwelling that the deceased estate acquires in any other way.

The trustee contends that the title change to Child B was unlawful as child B breached their duty as the executor for the deceased estate by not fulfilling the terms of the Will of the testator (transferring 100% ownership interest in the property to themself instead of 50% each between themself and Child A). Child B acknowledged the breach and entered a Deed of Family Arrangement with the trustee signing on behalf of child A.

Child B and the trustee signed the Deed of Retirement and Appointment of Trustee. Child B retired as the trustee and appointed the trustee as the new trustee. This led to the trustee taking over the title of the property.

However, we consider that based on the facts provided that a title change happened that removed the property from the estate. It still happened even if it was (as the trustee claimed) unlawful.

This issue is discussed (in a contract sense) in Taxation Ruling TR 94/29 Income tax: capital gains tax consequences of a contract for the sale of land falling through.

Paragraph 22 of the TR 94/29 provides that generally once a contract has been completed, in the sense that the purchaser has paid the balance of the purchase monies and the vendor has delivered the transfer and the title deeds to the purchaser, any subsequent dealings in respect of the land will constitute a fresh disposal and acquisition.

Paragraph 23 of the TR 94/29 provides that in some circumstances a contract may fall through after completion for reasons which will render the contract void from the beginning, that is, the contract is treated in law as never having come into existence.

Section 118-195 of the ITAA 1997 only applies to a dwelling the Estate acquired due to the deceased passing away.

However, in this case, the trustee then acquired the dwelling from Child B (after the abovementioned transfer occurred from the estate to child B as the beneficiary of the estate). As such, the dwelling was not acquired by the trustee due to the deceased passing away, and therefore section 118-195 of the ITAA 1997 will not apply in this case.

In addition, as we do not have evidence to support that the title transfer which occurred to Child B was rendered void from the beginning, section 118-195 of the ITAA 1997 does not apply in this case.

Question 2

Section 112-20 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the market value substitution rule. The first element of the cost base or reduced cost base of an asset will be taken to be the market value of the asset if the taxpayer did not incur expenditure to acquire it except where the acquisition of the asset resulted from either CGT event D1 happening or another entity doing something that did not constitute a CGT event happening.

After the deceased passed away, Child B transferred the property to themself as LPR of the deceased estate, and then subsequently to themselves as a beneficiary.

Later, Child B and the trustee entered a Deed of Retirement and Appointment of Trustee. As a result, the same trustee that was appointment as Child A's administrator was also appointed as the trustee of the deceased estate. The trustee then acquired the dwelling from Child B.

Therefore, the first element of the cost base in the hands of the trustee is the market value in early 20XX under section 112-20 of the ITAA 1997, as the trustee acquired the dwelling from child B on this date.