Edited version of private advice

Authorisation Number: 1052188410500

Date of advice: 19 December 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question 1

Will the Commissioner exercise his discretion under subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to tax income of the estate in accordance with section 99 of the ITAA 1936?

Answer

Yes.

Question 2

Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the two-year time limit to dispose of the Property and up to two hectares used primarily for private and domestic purposes?

Answer

The Commissioner will not grant an extension to the two-year period to dispose of your ownership interest in the dwelling.

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

The Deceased executed a Will in 20XX.

The Deceased died several years later.

The dwelling is located at Place A (the Property).

The Deceased acquired the Property prior to 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 Property is situated on over two hectares of land.

The Will named Person A and Person B as executors.

Probate was granted in 20XX.

The dwelling on the Property is many years old and constructed of weatherboard, cement sheet and corrugated iron.

The Property also has an older style weatherboard barn, disused derelict dairy, and timber livestock yards in poor condition.

The Property is divided into the dwelling and curtilage. The existing improvements are all contained within a well treed curtilage with the remaining land held in two larger paddocks.

The Property has an irrigation supply point and delivery share is provided to the Property. A delivery share is an entitlement to have water delivered to land in an irrigation area.

The Property comprises several adjoining Crown allotments held in one Certificate of Title.

The Property is zoned FZ2 - Farming Zone Schedule 2.

The Deceased owned the following assets in addition to the Property:

•         A large farm block (Block one) disposed of in a previous income year. The property extends over multiple lots on one certificate of title.

•         Block one is located within a FZ1 - Farming zoned allotment and contains a percentage of arable land with no dwelling entitlement able to be obtained for the property. Block one has no delivery share for an irrigation water or connection.

•         A small farm block (Block two) comprising an irregular shaped allotment (disposed of in a previous year).

•         Block two is zoned FZ1 - Farming Zone with Planning Scheme Overlays. It has a stock and domestic water supply available that is held as a diversion supply from a nearby river.

•         Block two has no dwelling entitlement due to its underlying land size and zone. It is impacted by drainage, water and electricity transmission easements (power lines) that reduce its useable area.

•         A quantity of high reliability water shares, all of which have been disposed of in previous income years

•         A quantity of low reliability water shares which were disposed of during a previous income year

•         Bank accounts which have been drawn in and closed in previous years

•         Shares which have been transferred to a beneficiary in accordance with the Will

All of the properties were acquired prior to 20 September 1985 by the Deceased as sole owner.

Initially, some of the beneficiaries wanted to have properties appropriated to their entitlement. It took some time to establish that all of the parties would not agree to this and that as a result, it was not possible.

The Will provided Person A with the option to purchase the Property, Block one and Block two in conjunction with all plant and equipment used for the running and maintenance of the farms and all the water shares for the market value at the date of commencement of the option.

The Will provided that Person A must exercise the option to purchase within a set number of days of probate being granted or a valuation being provided, whichever occurred later.

Person A had a specified number of months from the date probate was granted to pay the Estate if they exercised the option to purchase.

Person A lived at the Property from at least the date of the Deceased's death until settlement of the Property.

Person A undertook farming activities which primarily involved maintenance of livestock up until they were sold and sale of the yearly water entitlements.

The executors made an interim cash distribution to each of the beneficiaries several years ago. However, no further action was taken to administer the Estate.

As stated above, Person A had an option to purchase the Property. However, they were unable to obtain finance to do so.

The executors failed to administer the Estate following the interim distribution, until proceedings were commenced in the Supreme Court several years later.

Person C and Person D first wrote to the administrators several years ago to ask for a full accounting of the administration of the Estate. Person C and Person D are both children of the Deceased.

The following year, proceedings to remove the executors and file an administration account were initiated by Person C and Person D.

Reasons for requesting removal of the executors included delay and breaches of executors' duties.

Person E was appointed as the administrator of the Estate, pursuant to orders made in the Supreme Court.

As Person E was not a party to the proceedings, they were not informed of their appointment until several months after the court proceedings took place. An administration account was served on them the following year.

There have been difficulties getting past records relating to the Estate, particularly from the former executors.

Company A were appointed as replacement tax agents.

Assets currently owned by the Estate have been called in by the administrator.

There is a portion of the net income of the Estate to which no beneficiary is presently entitled.

The last sale of livestock occurred in the income year ending 30 June 20XX.

To allow sale of the farm block separately from the dwelling on the Property, water connection was required. This process took many months to complete and occurred during COVID. It resulted in a delay in the auction of the Property.

The Property, along with Block one and Block two were sold with settlement occurring some months later.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 99

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Issue

Subsection 99A(2) discretion

Question 1

Summary

The Commissioner will exercise his discretion under subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to tax the net income of the Estate to which no beneficiary is presently entitled under section 99 of the ITAA 1936.

Detailed reasoning

Section 99 and 99A of the ITAA 1936 operate to tax trustees of a trust if there is part of the net income of a trust estate to which no beneficiary is presently entitled at the end of an income year.

Section 99A of the ITAA 1936 will automatically apply to tax the net income of a trust estate unless:

a)    The trust estate is of a type specified in paragraphs (a) - (d) in subsection 99A(2) of the ITAA 1936; and

b)    The Commissioner considers that it would be unreasonable for section 99A of the ITAA 1936 to apply (having regard to the circumstances in subsection 99A(3) of the ITAA 1936)

Generally, the Commissioner will exercise his discretion to tax the trustee of a deceased estate at the trustee's individual marginal rate under section 99 of the ITAA 1936.

If the discretion is not exercised, income of a deceased estate will be taxed at the highest marginal rate under section 99A of the ITAA 1936.

In considering whether to exercise the discretion, the Commissioner will have regard to the matters set out in subsection 99A(3) of the ITAA 1936.

These matters include:

•         Whether any property was acquired by or lent to the trust estate

•         Whether income was derived by the trust estate

•         Whether any benefits were conferred on the trust estate

•         Whether any special rights or privileges were conferred on or attached to property of the trust estate.

Application to your circumstances

You have advised that:

•         you are not aware of any property being acquired by or lent to the Estate

•         no loans have been made by the Estate

•         the income of the Estate is derived only from assets held or deemed to belong to the Estate as at the date of the Deceased.

•         There are no special rights or privileges attached to any property of the Estate.

•         You are not aware of any property that was acquired prior to the date of death of the Deceased for any purpose other than the enjoyment of the Deceased during their lifetime

Having considered your circumstances, the Commissioner will exercise the discretion to assess the income of the estate in accordance with section 99 of the ITAA 1936.

Issue

Deceased estate - two-year discretion

Question 2

Summary

The Commissioner will not grant an extension to the two-year period to dispose of your ownership interest in the dwelling.

Detailed reasoning

A capital gain or capital loss may be disregarded where a capital gains tax event happens to a dwelling if you owned it as the trustee or beneficiary of the deceased estate.

For a dwelling acquired by the deceased before 20 September 1985, you will be entitled to a full exemption if your ownership interest ends within two years of the deceased's death. Your ownership interest ends at the time of settlement of the contract of sale.

In your case, the Deceased acquired the Property prior to 20 September 1985. After the Deceased passed away, you owned the Property as trustee of the estate. The Property was the deceased's main residence until just before they passed away and was not being used to produce assessable income at the time.

The Property sale settled more than two years after the Deceased's death. Therefore, you require the Commissioner's discretion to extend the two-year period to be eligible for an exemption.

Practical Compliance Guideline PCG 2019/5 The Commissioner's discretion to extend the two-year period to dispose of dwellings acquired from a deceased estate provides guidance on factors we consider when deciding whether to grant the discretion

Paragraph 3 of PCG 2019/5 provides that we will allow a longer period where the dwelling could not be sold and settled within two years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first two years.

Paragraph 14 of PCG 2019/5 explains we weigh up all of the factors (both favourable and adverse).

Paragraph 17 of PCG 2019/5 provides a list of other factors that may be relevant to the exercise of the Commissioner's discretion which includes the sensitivity of your personal circumstances.

Application to your circumstances

In your case, we consider as favourable factors:

•         time taken for Person A to attempt to gain finance to purchase the other beneficiaries' interests in the Property

•         the short period of time between when the administrator was appointed, and the Property was placed on the market and subsequently sold

•         difficulties experienced by the administrator when trying to obtain past records, including from the former executors.

We also considered the following:

•         the extended period of time during which no action was taken to progress the sale of the Property

•         court proceedings to appoint an administrator did not occur until many years after the death of the Deceased

•         there were no factors to suggest that the Deceased's estate was complex which would account for a delay in completing administration of the Estate

•         there were no unforeseen or serious personal circumstances arising during the two-year period following the death of the Deceased such that the Estate was not able to be administered.

We acknowledge that once an administrator was appointed, action was taken quickly to administer the estate. However, there was a substantial period of time before this that no action was taken.

We also acknowledge that COVID did cause some delays once an administrator was appointed, however, again there was a substantial period of time before this that no action was taken.

Having considered the relevant facts, we will not apply the discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the two-year time limit.

Therefore, the normal capital gains tax (CGT) rules will apply to the disposal of the property. You should note that the first element of your cost base for the property is its market value on the deceased's date of death. The cost of repairs can also be included in the cost base of the property. You are also entitled to the 50% CGT discount in relation to the property.