Edited version of private advice

Authorisation Number: 1052328377337

Date of advice: 7 November 2024

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise his discretion in subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the 2 year time limit to enable the small business capital gains tax (CGT) concessions in Division 152 of ITAA 1997 to be applied in relation to the sale of the properties?

Answer

Yes.

Having considered your circumstances and the relevant factors, the Commissioner will allow an extension of time as there is evidence of an acceptable explanation for the period of extension requested, and it would be fair and equitable in the circumstances to provide the extension.

Note: The private ruling on whether an extension of the time limit will be granted was issued on the basis that the Commissioner did not consider your or the deceased's eligibility for the small business concessions and will be limited to the ruling question.

This ruling applies for the following periods:

Year ended 30 June 2023

Year ended 30 June 2024

Year ending 30 June 2025

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

The Deceased passed away in the 20XX-XX financial year.

The deceased left a will.

There are 2 Executors, the Deceased's spouse, Executor A and the Deceased's child, Executor B.

The Executors live a significant distance from each other.

The Deceased was the owner of farming properties that they acquired at different stages, comprising of Property A and Property B.

The addresses and title details of the properties were provided.

The properties were previously used within a farming operation in a Partnership with Executor A, up until 20XX.

The properties were then leased during that financial year from a particular date.

The lease contained an option to a further 12 months.

During the 2019-20 financial year, the lease was extended for 12 months.

The COVID pandemic was declared on a particular date in your state, which resulted in significant disruption to business processes.

The Executors are represented by separate legal firms.

There were two issues relating to the Partnership which caused delays in applying for probate and realising (selling) Estate assets.

(i)    The Will was not formally challenged. There was an element of contention and dispute between the Executors as to the assets comprised in the Estate and the Partnership and the respective interests of the Deceased and Executor A in the Partnership.

(ii)   The freehold property known as Property A was registered in the Deceased's sole name. The freehold property known as Property B was registered in the name of the Deceased and Executor A. Property B was referred to in the financial statements relating to the Partnership as a Partnership asset. Although there was no specific reference to Property A in the financial statements of the Partnership, there was however reference to additional property called Property C. There was initially some confusion on the part of the accountant formerly dealing with the matter as to whether Property A was in fact the land referred to as Property C and that it may have been wrongly referred to in the Partnership financial statements as an asset of the Partnership. It was necessary to clarify what land titles were comprised in assets of the Partnership, which took some time. The additional land referred to as Property C was ultimately determined to be Partnership property". Property C was established to be an old name for part of the land comprised in part of the overall property known as Property B and is not Property A.

The Deceased's interest in Property A and their interest in the Partnership were the subject of separate gifts in the Will and the beneficiaries of each gift were not identical. It was important to determine what assets were held by the Partnership and the extent of the respective interests of the Estate and One of Executor A in the Partnership.

A significant cause for the contentiousness nature of the administration of the Estate is that there was a "blended" family. Executor A, is the Deceased's second spouse, while Executor B, is the Deceased's child from their first marriage. The Deceased and Executor A both had previous marriages.

Due to the contention between the Executors, the communications conducted between were largely conducted between their respective lawyers in formal correspondence. It also took time to go into past financial and other records to deal with questions which were raised.

Resolution of these issues took a considerable amount of time. Resorting to litigation would not have been an effective way of attempting to resolve the matter as well as being extremely costly and would have resulted in further delay.

It was necessary to make corrections to the financial statements of the Partnership. The review of the revised financial statements of the Partnership and the question of the determination of the respective interests of the Deceased (and therefore their Estate) and Executor A in the Partnership were referred to an independent firm of accountants, Accountant A on a particular date during the 2020-21 financial year. Financial statements and adjusted financial statement relating to the Partnership were referred to Accountant A.

The Executors needed to ensure that the Estate's equity in the Partnership was accurately recorded.

Given that Executor A was also a partner in the Partnership and Accountant B, the previous accountant for the Partnership is also Executor A's accountant, that there was at least a perceived conflict of interest, so an independent accountant that was mutually agreed to by the Executors was sought.

The Accountant A review was an extensive process and required further information and clarification from both Executors and their advisors.

A natural disaster occurred during the 2020-21 financial year, passing over the Estate's properties causing significant damage. The natural disaster was one of the deadliest of its kind in the Australian region.

Accountant A delivered their final report to the executors on a particular date in the 2021-22 financial year. These matters delayed the application for Probate and realisation of assets of the Estate.

The statement of assets and liabilities filed as part of the application for probate included figures determined in the Accountant A report.

The processing of insurance claims was significantly delayed and difficult because of the quantum of the claims in the region that were made. The ability to engage contractors to repair buildings and sheds almost non-existent.

Notwithstanding that the properties have been sold, there are some outstanding insurance claims.

Sale of the properties could not occur until the following:

•         Probate was granted and

•         insurance matters from the cyclone damage was resolved and understood.

The reasons for the delay in requesting Probate included:

•         difficulty in resolving some contentions and issues between the Executors

•         difficulty in engaging professionals, legal and tax, to accurately calculate the assets and liabilities of the Estate

•         difficulty caused by the distance between the 2 Executors and the respective legal, accounting and tax advisors

•         COVID19 created numerous communication issues

•         A natural disaster created personal as well as Estate work that made it difficult to be fully focused on Estate matters.

During COVID19 there were difficulties caused due to various lockdowns i.e. movement from one region to another and having face to face meetings were difficult, if not impossible to arrange.

Due to the element of contention, the communications between the Executors were largely conducted between their respective lawyers in formal correspondence. It was necessary to go into past financial and other records to address the questions that arose and this took a considerable amount of time.

It was not possible to sell Property A, which was in the Deceased's sole name, until Probate was obtained.

With regard to Property B, although this was in the joint names of the Deceased and Executor A, it was Partnership property (in which Executor A and the Deceased's Estate had an interest) and in practical terms would only be sold with the approval of both Executors, which was dependent on Probate being granted.

Executor B had informal discussions and obtained informal agreement in relation to Property A from 4 of the other beneficiaries regarding which offers would be accepted and the price.

Insurance proceeds for damage caused by the natural disaster have not been settled. The insurance claims relate to damage to structures and equipment on Property A and Property B caused by the natural disaster in the 2020-21 financial year.

Probate was applied for in the 2022-23 financial year. Probate was granted soon after.

The properties were put on the market in the 2022-23 financial year.

Both Property A and Property B were marketed and sold as a single unit to the same buyer and as a going concern.

The contracts of sale for the properties were signed in the 2022-23 financial year.

Settlement of the properties took place in the 2022-23 financial year.

The sales price of each property was provided.

Had the properties been sold while the Deceased was alive, they would have been active assets and eligible for the Small Business CGT concessions.

The Executors did not have authority to settle the insurance claim until Probate was obtained. Loss adjusters acting on behalf of the insurer proposed a settlement. When the Executors attempted to finalise the insurers raised a number of questions and have indicated that they do not consider that the earlier settlement discussed is appropriate as the properties have been sold. The Executors will be taking Counsel's opinion.

You supplied copies of the email correspondence between Legal Representative A (on behalf of the Executors) and Legal Representative B on behalf of the underwriter (the insurer).

The insurance proceeds will generate a CGT event.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 152-80(3)