Edited version of private advice

Authorisation Number: 1052222663125

Date of advice: 20 February 2024

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 to allow an extension of time in relation to the sale of the Property to a beneficiary of the Estate?

Answer

No.

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX.

Relevant facts and circumstances

Person A was born in Country X and immigrated to Australia in the early 1980's.

Some years later Person A signed their Will while they were in Country X, which included the following:

•         Named Person B, lawyer from legal firm Company Z, and Person C, as joint Executors and Trustees of the Will; and

•         The Will provided for assets of the Estate to be transferred to the several named beneficiaries in equal portions.

At some point the Will was provided to Person B, or someone in the employ of Company Z.

After 20 September 1985, Person A purchased a property in Australia (the Property), being some years after the Will was signed.

Person B was Person A's lawyer after their arrival in Australia until they passed away and had assisted Person A with the purchase of the Property.

Person A's Will did not provide for any person to have a life interest or right to occupy the Property.

Person A and their spouse lived at the Property from the time it was purchased, with both requiring assistance in living in Australia as neither spoke conversational English.

It was a cultural practice for a child to live with their parents and inherit the family home and Person A invited one of their children (Person D) and Person D's family to move into the Property some years after the Property was purchased, living there rent free in exchange for the financial contributions made by Person D in relation to the Property.

Prior to moving into the Property, Person D organised for the refurbishment of the Property which included painting, carpentry, installation of carpets and central heating, gardening and general repairs.

Prior to their passing, Person A travelled to Country X for short trips to visit some of their children and former spouse and check in on some business interests, returning to the Property upon their return to Australia.

Person A (the Deceased) passed away in Country X prior to 1996 after travelling there for a short trip with the intention of returning to the Property upon their return to Australia.

The Deceased was an Australian resident for taxation purposes when they passed away, having continuously been an Australian resident since they immigrated to Australia.

The Property was the Deceased's main residence when they passed away which had not been used to produce income during the Deceased's ownership period.

The Property was not used for income producing purposes after the Deceased passed away with Person D and their family continuing to reside at the Property after the Deceased passed away. Person D paid for the utilities, council rates, insurance and upkeep of the Property after the Deceased's passing.

None of the other beneficiaries listed in the Will had resided at the Property, nor had they nominated the Property as their principal place of residence.

At the time of their passing, the Deceased held shares in several companies. Person D continued to operate the family group of companies of which the Deceased had been a shareholder after the Deceased's passing. The companies held significant assets including commercial real estate and shares listed on the Australian Stock Exchange.

Person D made enquiries with Company X in relation to the Deceased's Will, and whether they held it. Person B searched and made enquiries about the Will within their office but was not able to locate the Deceased's Will.

The Deceased had been married multiple times, with numerous children. The beneficiaries named in the Will were both Australian residents and non-Australian residents, with some of them living in Country X and several other countries. Many of them were in conflict and advice was not sought as to what was needed to be done in the absence of a Will with none of the beneficiaries seeking advice or instructing legal representatives to apply for Letters of Administration.

Person D made a subsequent enquiry with Company X around 10 or more years after their initial enquiry as to whether they held the Deceased's Will.

More than 15 years after the Deceased passed away the Deceased's Will was found by a staff member at Company X, which had been stored in another client's files.

Person B notified several of the Deceased's children that the Deceased's Will had been found who informed them that they had been in discussions with another solicitor employed at Company X in relation to the Will and that they were trying to negotiate a Deed of Family Arrangement between the beneficiaries.

Shortly after Bob had notified the beneficiaries that the Will had been found, a dispute arose between the beneficiaries in relation to their entitlements to the assets of the Estate, which continued for several years after the Will was found.

Person B was instructed to apply for probate of the Estate when it became apparent that the beneficiaries could not reach an agreement, and to then distribute the Estate in accordance with the Will, being the equal division between the beneficiaries.

Probate of the Estate was granted to the joint executors under the Will, being Person B and Person C (collectively referred to as the Executors) more than 15 years after the Deceased has passed away.

The Executors granted permission for Person D and their family to continue to use and occupy the property until the final distribution of the Estate.

Shortly after probate was granted a letter was sent to the beneficiaries from the Executors advising that in the absence of joint instructions from all beneficiaries the Estate would be administered in accordance with the Will, with a copy of the grant of probate of the Will provided to the beneficiaries.

Some months later a letter was sent to the Executors from several of the beneficiaries stating that they were not agreeable to the proposed transfer of the assets of the Estate as set out in the Will.

The beneficiaries continued to dispute the distribution of the Estate assets in accordance with the Will for more than five years after probate was granted, specifically in relation to the distribution of assets in equal shares between the beneficiaries until they entered into a Settlement Deed more than 25 years after the Deceased had passed away.

The Settlement Deed provided for the distribution of the Estate's assets as follows:

•         All companies, which are controlled by the Estate, should be placed into voluntary liquidation and any proceeds from the liquidation should be split equally between the beneficiaries

•         Any marketable securities, such as listed equities, should be sold and the proceeds split equally between the beneficiaries; and

•         Person D should purchase the Property from the Estate at market value, with the proceeds being split equally between the beneficiaries.

The sale of the marketable securities and the liquidation of the companies were finalised more than two years after the Settlement Deed was entered.

Person D waited until the funds from the liquidation of the companies were distributed to them by the Executors to finance the purchase of the Property.

The title of the Property was transferred to Person D by the Executors more than 25 years after the Deceased had passed away.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

In certain circumstances, section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the trustee/beneficiary 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/beneficiary of a deceased estate if:

•         The property was acquired by the deceased before 20 September 1985, or

•         The property was acquired by the deceased on or after 20 September 1985 and the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income, and

•         Your ownership interest ends within 2 years of the deceased's 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 dwelling to be eligible for the exemption. The intention behind this legislation was that the inherited dwelling was to be immediately sold after the date the deceased passed away.

This period was extended to two years 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 dwelling 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.

The Commissioner has discretion to extend the two-year time period where the trustee or beneficiary of a deceased estate's ownership interest ends after two years from the deceased's death. Practical Compliance Guideline PCG 2019/5: The Commissioner's discretion to extend the two-year period to dispose of dwelling acquired from a deceased estate outlines the factors that the Commissioner will consider when determining whether to exercise his discretion to extend the two-year period under section 118-195 of the ITAA 1997. This discretion may be exercised in situations such as where:

•         The ownership of a dwelling or the will is challenged

•         A life or other equitable interest given in the will delays the disposal of the dwelling

•         The complexity of a deceased estate delays the completion of administration of the estate

•         Settlement of the contract of sale of the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control.

These examples are not exhaustive. They provide guidance on what factors the Commissioner would consider reasonable to exercise his discretion to extend the two-year period.

PCG 2019/5 also outlines factors that would weigh against the Commissioner allowing a longer period. Some factors include inconvenience on the part of the trustee or beneficiary to organise the sale of the dwelling or unexplained periods of inactivity by the executor in attending to the administration of the estate.

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 circumstances

In this case, the Deceased acquired the Property after 20 September 1985 which was their main residence until they passed away some years later. The Property was not used to produce assessable income either by the Deceased during their ownership period, or after their passing, with Person D and their family continuing to live at the Property prior to and after the Deceased passed away.

Settlement on the sale of the Property from the Estate to Person D occurred more than 25 years after the Deceased passed away.

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

We have taken the following into consideration when making our decision:

•         The exemption in relation to the disposal by trustees or beneficiaries of a deceased estate at the time the Deceased passed away was for a 12-month period to sell the relevant property which was not extended to two years until 1996. No activities were undertaken to dispose of the Property within the 12-month period that was applicable to be entitled to the exemption at the time the Deceased passed away.

•         It is stated that from the time the Deceased's Will was found until the Settlement Agreement was entered, the beneficiaries of the estate disputed distribution of the estate's assets amongst themselves. These disputes delayed administration of the estate and ultimate disposal of the Wollstonecraft property.

However, the Deceased's Will was not found for more than 15 years after the Deceased passed away. Therefore, any disputes arising after the Will was found did not impact the lack of activities of any party in relation to getting the Estate administered promptly.

•         The Will did not provide any party with a right to occupy and/or a life interest in the Property. Therefore, this had not affected the progression of the administration of the Estate and the disposal of the Property by the Executors. These issues do not amount to legal impediments to the sale of the Property.

•         Person D and their family had continued to benefit from living at the Property after the Deceased passed away with no continuous activities being undertaken to get the Estate administered. This indicates that there were no serious attempts to progress towards the sale of the Property in the period immediately after the Deceased passed away.

•         It is stated that the Estate was complex with the liquidation of the companies as required under the Settlement Agreement being a drawn-out process that involved the sale of commercial real estate, as well as attending to final tax calculations and lodgement of final income tax returns for the companies.

Up until the Settlement Agreement was entered into more than 25 years after the Deceased passed away, Person D continued to operate the family group of companies of which the Deceased had been a shareholder. The existence of the companies had not contributed to the lack of activities of any party in relation to the administration of the Estate.

•         It is stated that to fund purchase of the Property from the Estate, Person D was required to wait until funds from liquidation of the companies had been distributed to him by the Executors/Liquidator. Transfer of the property from the estate to Person D was therefore delayed until liquidation of the companies had been finalised.

The Settlement Agreement was entered into more than 25 years after the Deceased passed away, with the sale of the marketable securities and liquidation of the companies being finalised more than two years later.

Person D had made the choice to wait for the distribution of the funds from the Estate which added an additional period of several years before settlement on the sale of the Property to Person D occurred, being more than 25 years after the Deceased passed away. None of these matters are impediments to the sale of the Property.

•         It is stated that the Executors were not aware of the existence of the Will because Person B's employed solicitor did not notify them that they were listed as executor. Persons B and C only became aware of their roles as Executors more than 15 years after the Deceased had passed. Advice was not sought as to what was needed to be done in the absence of a Will prior to it being located and bought to the attention of Person B, in circumstances given these factors none of the beneficiaries sought advice or instructed legal representatives to apply for Letters of Administration.

Based on the information provided, Person D's initial query with Company Z about the Deceased's Will occurred more than two years after the Deceased had passed, with Person D not pursuing any further action until they made a further query 10 or more years later, with the Will being found at Company Z around that time, being more than 15 years after the Deceased passed away.

No information has been provided to support that any party had undertaken any serious activities in relation to the administration of the Estate from the time the Deceased passed away up until around the time the Will was found.

•         Probate of the Estate was granted to the Executors, almost 20 years after the Deceased passed away. Until probate was granted, the Deceased's Will had not been proven and the Executors did not have the authority to deal with the Estate, including dealing with the sale of the Property.

In conclusion, there is no evidence that attempts were made to sell the Property promptly after the Deceased passed away and that the first serious attempt to move in that direction did not occur until some 16 years later.

Having considered the information provided with the ruling, 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 due to the lengthy period of inactivity from the date the Deceased passed away until steps were commenced to administer the Estate around the time the Will was found.