Edited version of private advice

Authorisation Number: 1052199325176

Date of advice: 8 December 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 Estate to dispose of their ownership interest in the Property and disregard the capital gain or capital loss made on the disposal?

Answer

Yes.

Question 2

Will the Commissioner exercise the discretion under subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to tax the trustee of the Estate on income that no beneficiary is presently entitled to under section 99 of the ITAA 1936?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX.

Relevant facts and circumstances

The Deceased died on DD MM 20XX.

As at date of death:

•         The Deceased left a Will dated DD MM 20XX. The Will appointed Executor 1 and Executor 2 as co-executors. The beneficiaries were Beneficiary Group A and Beneficiary Group B.

•         The Deceased owned the Property. The Property was the main residence of the Deceased and was not being used to produce assessable income before they died.

On DD MM 20XX, Group A filed a caveat questioning the Deceased's capacity to make the Will dated DD MM 20XX, alleging the Will was subject to a mutual will agreement made on or around DD MM 19XX.

At a mediation held later in 20XX, the Beneficiary Group A and the Beneficiary Group B agreed that an independent administrator be appointed to administer the Estate.

On DD MM 20XX, the Administrator was appointed by the Supreme Court.

On DD MM 20XX, the Group A filed and served on the Administrator a writ and statement of claim in relation to the mutual Will claim.

On DD MM 20XX, the Court made orders adding the Beneficiary Group B to the mutual Will proceeding.

Due to an ongoing dispute between the Beneficiary Group A and the Beneficiary Group B as to whether the Property and chattels were to be sold or maintained, the Administrator applied to the Supreme Court on DD MM 20XX for directions.

In MM 20XX and prior to the matter being heard, the Group A and the Beneficiary Group B agreed that the Property be sold.

The Administrator took immediate steps to prepare the Property for sale, which included the distribution of contested chattels and placed the Property on the market in early MM 20XX.

The Property is situated on less than two hectares of land.

The Property was auctioned on DD MM 20XX.

The Property settled on or around DD MM 20XX.

Trust tax returns have been lodged for the income years 20XX-XX to 20XX-20XX inclusive.

The significant assets of the Estate are:

•         The Property.

•         A share portfolio which was disposed of in MM 20XX.

•         A self-managed superannuation fund.

Other assets currently owned by the Estate have been called in by the Administrator.

At this point it has not been identified:

•         That any property has been acquired by or intentionally lent to the Estate, or any property was acquired by the Deceased prior to their passing for any purposes other than the enjoyment of the Deceased during their lifetime; or

•         That there are any special rights or privileges attached to any property of the Estate.

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

The Estate is subject to ongoing litigation with a trial commencement date of DD MM 20XX. It is not expected that a judgment will be delivered until early to mid-20XX.

The administration of the Estate has not occurred within three years of the Deceased passing away.

It is anticipated that the Estate will be fully administered during the ruling period.

Assumptions

For the purposes of this ruling, the following assumptions have been made:

•         No property has been, or will be, acquired by or intentionally lent to the Estate.

•         No property was acquired by the Deceased prior to their passing for any purposes other than the enjoyment of the Deceased during their lifetime; and

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

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 subsection 99A(2)

Income Tax Assessment Act 1936 subsection 99A(3)

Reasons for decision

Question 1

The Commissioner's discretion to extend the two-year period to dispose of dwellings acquired from a deceased estate

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 that was the deceased's main residence just before their death and not used by them to produce income at that time, the estate will be entitled to a full exemption if their ownership interest ends within two years of the deceased's death. The ownership interest ends at time of settlement of the contract of sale.

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 (PCG 2019/5)provides guidance on factors we consider when deciding whether to grant the discretion.

Paragraph 3 of PCG 2019/5 provides that generally we will allow a longer period where the delay in the sale of the dwelling was due to reasons beyond your control that existed for a significant portion of the first two years. Paragraph 12 of PCG 2019/5 outlines favourable factors. One of the circumstances listed in paragraph 12 is where the will is challenged. Paragraph 13 of PCG 2019/5 outlines unfavourable factors. 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.

Application to your situation

In your case, the Property was the Deceased's main residence just before their death and not used by them to produce income at that time. The Property sale settled more than years after the Deceased's death. Therefore, you require the Commissioner's discretion to extend the two-year period to be eligible for the exemption.

The delay in the disposal of the Property was due to litigation in relation to the Estate. After consideration of your circumstances and the relevant factors set out in the Practical Compliance Guideline PCG 2019/5, the Commissioner will allow an extension of time to dispose of your ownership interest in the property. Further information about the Commissioner's discretion can be found by searching ato.gov.au for 'QC 66057'.

Question 2

Commissioner's discretion under subsection 99A(2) of the ITAA 1936 in relation to deceased estates

Section 99A of the ITAA 1936 applies in the case of trust estates of deceased persons unless the Commissioner, pursuant to subsection 99A(2) of the ITAA 1936, forms the opinion that it would be unreasonable for section 99A of the ITAA 1936 to apply in relation to the deceased estate in relation to the particular year of income.

In exercising the discretion, the Commissioner will have reference to the text of the legislation itself, the intent or purpose of the legislation and relevant case law as they apply to the facts and circumstances of a particular case for the purpose of forming the required opinion under subsection 99A(2) of the ITAA 1936.

The types of trust estate in respect of which the Commissioner's discretion may be exercised are listed in paragraphs 99A(2)(a) to (d) of the ITAA 1936 and include a trust estate that resulted from a will (paragraph 99A(2)(a) of the ITAA 1936).

In forming the opinion for the purposes of subsection 99A(2) of the ITAA 1936 the Commissioner is required to have regard to the matter subsections 99A(3) and (3A) of the ITAA 1936 as follows:

99A(3) In forming an opinion for the purposes of subsection (2):

(a)  the Commissioner shall have regard to the circumstances in which and the conditions, if any, upon which, at any time, property (including money) was acquired by or lent to the trust estate, income was derived by the trust estate, benefits were conferred on the trust estate or special rights or privileges were conferred on or attached to property of the trust estate, whether or not the rights or privileges have been exercised;

(b)  if a person who has, at any time, directly or indirectly:

(i) transferred or lent any property (including money) to, or conferred any benefits on, the trust estate; or

(ii) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of the trust estate whether or not the right or privilege has been exercised;

has not, at any time, directly or indirectly:

(iii) transferred or lent any property (including money) to, or conferred any benefits on, another trust estate; or

(iv) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of another trust estate, whether or not the right or privilege has been exercised;

the Commissioner shall have regard to that fact; and

(c)   the Commissioner shall have regard to such other matters, if any, as he or she thinks fit.

99A(3A) For the purposes of the application of paragraph (3)(a) in relation to a trust estate of the kind referred to in paragraph (2)(a), a reference in that first-mentioned paragraph to the trust estate shall be read as including a reference to the person as a result of whose death the trust estate arose.

Application to your situation

The Trustee has and will retain net income in respect of the income years throughout the ruling period. This net income will fall to be assessed to the Trustee under section 99A of the ITAA 1936 in respect of each year unless the Commissioner exercises the discretion.

We have taken the following into consideration when determining whether the Commissioner's discretion would be exercised:

•         The Estate is a deceased estate that resulted from the Will of the Deceased which satisfies the requirement of paragraph 99A(2)(a) of the ITAA 1936.

•         The Estate is still in the 'period of administration' (per Taxation Ruling IT 2622) such that no beneficiary has been made presently entitled to the income of the Estate.

•         The Estate has not been fully administered at this point due to ongoing litigation.

•         No property has been, or will be, acquired by or intentionally lent to the Estate. No property was acquired by the Deceased prior to their passing for any purposes other than the enjoyment of the Deceased during their lifetime. There are no special rights or privileges attached to any property of the Estate.

•         It is accepted that:

o                   The Trustee has not, and will not, use their powers under the Will to avoid tax

o                   The Trustee is the executor of a deceased estate, and has exercised their powers under the Will in a conventional manner (and not as a tax-avoidance device); and

o                   The Estate is a deceased estate wherein the assets of the Deceased are being administered in a conventional manner.

Having regard to the above matters, and the legislated purpose of section 99A of the ITAA 1936 to prevent the use of trusts for tax avoidance, the Commissioner is of the opinion that it is unreasonable for section 99A to apply to the Trust in respect of each of the income years throughout the ruling period.

Therefore, the Commissioner's discretion will be exercised for the income years included in the ruling period.