Private ruling: Capital gains tax - deceased estate - Commissioner's discretion
Date of advice: 29 September 2015
Published: November 2015
Ruling period: Income year ending 30 June 2015.
Date scheme commenced: 1 July 2014.

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to the two year period to dispose of an inherited dwelling? | A1: No.

Relevant facts and circumstances: The deceased purchased an underlease in a property (the property) before 20 September 1985, which was their main residence. The deceased passed away a number of years later. A professional administrator of deceased estates was appointed as the Trustee of the deceased's estate (the Trustee). In their will the deceased bequeathed their estate in equal shares to a number of charities. At the time the deceased passed away, the title of the property was in the process of being converted from "company title" to "community title", with all of the holders of properties in the same block of properties deciding to transfer their ownership of their properties from "company title" to "community title". Probate was granted on the deceased's estate around four months after the deceased passed away. The new title for the property was issued around 21 months after the deceased has passed away. Around 28 months after the deceased passed away, the Trustee had engaged the services of an agent to sell the property. However as this was close to a holiday period, it was recommended that the property was not put on the market over the holiday period, with the marketing of the property not commencing until about three months after the agent had been engaged. A contract for the sale of the property was signed around five months after the agent was engaged, with settlement occurring around two months later. Copies of a number of documents have been provided with the private ruling application, which should, be read in conjunction with and forms part of the scheme of this private ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 118-160 | Income Tax Assessment Act 1997 Section 118-165 | Income Tax Assessment Act 1997 Section 118-195 | Income Tax Assessment Act 1997 Section 118-200

Reasons for decision: Detailed Reasoning - Commissioner's discretion under section 118-195 of the ITAA 1997: In certain circumstances, section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the trustee of a deceased estate may disregard an assessable gain or loss made from the disposal of a dwelling that passed to them in their capacity as trustee of a deceased estate. In relation to dwellings acquired by a deceased person before 20 September 1985, but who passed away after that date, one of the circumstances for the exemption under section 118-195 of the ITAA 1997 to apply is that the dwelling needs to be disposed of by the trustee within two years of the date of 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. However, the Commissioner has the power under section 118-195 of the ITAA 1997 to extend the two year period to dispose of an inherited dwelling in relation to CGT events that happened in the 2008/09 year and later income years in accordance with the explanatory memorandum (EM) to the Bill that added the discretion to section 118-195 of the ITAA 1997, (the Tax Laws Amendment (2011 Measures No 9) Bill 2011). This enables a trustee or beneficiary of a deceased estate to apply to the Commissioner to grant an extension of the two year time period to dispose of the deceased's dwelling, where the CGT event happens in the 2008-09 income year or later income years. Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example: • the ownership of a dwelling or a will is challenged • the complexity of a deceased estate delays the completion of administration of the estate • a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury); or • the settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control. These examples are not exhaustive, but provide guidance on what factors the Commissioner would consider reasonable to exercise his discretion to extend the two year period to dispose of an inherited dwelling. In exercising the discretion the Commissioner will also take into account whether and to what extent the dwelling is used to produce assessable income and for how long the trustee or beneficiary held the ownership interest in the dwelling. Whether the Commissioner will exercise his discretion under subsection 118-195(1) of the ITAA 1997 will depend on the facts of each case. Other factors which may be relevant include but are not limited to: • the sensitivity of personal circumstances of the beneficiary and other surviving relatives of the deceased; and • the degree of difficulty in locating the beneficiary to prove the will. The relevance and weight to be given to each of the factors described above will depend upon the circumstances of each particular case. Examples of reasons considered not to be acceptable for exercising the Commissioner's discretion may include: • waiting for the property market to pick up before selling the house, • delay due to refurbishment of the house to improve the sale price, • inconvenience on the part of the trustee or beneficiary to organise the sale of the house, or • unexplained periods of inactivity by the executor in attending to the administration of the estate. It is considered that the trustee has a choice in the situations described above. Accordingly, the Commissioner would not exercise the discretion under those circumstances. | Detailed Reasoning - Application to your situation: The following statements have been provided in the private ruling application: • once the Trustee had begun administering the deceased's estate, it had made a decision to postpone the sale of the property until the transfer of the title from "company title" to "community title" was complete, which had been in progress when the deceased had passed away • the Trustee had relied on external advice and anticipated that the title conversion process was to be finalised before probate issued, which was not the case. The process was far more difficult and lengthy than anticipated. The Trustee used all reasonable endeavours to expedite the conversion process during the period of administration, but without success • the process of converting the title of the property from company title to community title took ages and the Trustee had wanted to wait until the title had been converted as this would improve the value of the property and its chances of sale • some work needed to be done to the property to get it into a saleable condition and the Trustee had no funds in the estate to cover them; and • the disposal of the property had taken longer than two years due to the complex nature of the administration of the deceased's estate. In this case the Commissioner has decided not to exercise his power to extend the two year period available to the trustee of the deceased estate to dispose of the inherited property for the purposes of section 118-195 of the ITAA 1997. We have taken the following into consideration when making our decision: • the process of converting the title of the property from company title to community title had been in progress when the deceased had passed away • the Trustee had relied on external advice and had anticipated that the title conversion process would be finalised before probate on the deceased's estate was granted • the Trustee made the decision to postpone the sale of the property until the conversion of the property title was complete as this would improve the value of the property and its chances of sale • the conversion process was more difficult and lengthy than anticipated by the Trustee and it had used all reasonable endeavours to expedite the conversion process during the period of administration, but without success • the new title for the property was not issued until almost two years after the deceased had passed away • converting the titles from company title to community title eroded all of the funds held in the strata, which had resulted in any strata repairs being put on hold until after the conversion • the property needed maintenance work done to it • the deceased's estate did not have sufficient funds after the conversion of the title to complete the repairs and an agreement had been reached with the Strata Manager after the new title had been issued to have the costs of the repairs deducted from the sale proceeds • the repairs to the property were completed after the new title had been issued and the sale of the property was put on hold until after the repairs had been completed as it would affect the sale of the property • the Trustee arranged for valuations of the property which were provided to the beneficiaries of the deceased's estate. The beneficiaries of the deceased's estate were consulted by the Trustee in relation to whether or not the property should be sold as is, or after the improvements had been completed. The Trustee arranged for some appraisals of the property as requested by the beneficiaries in relation to the selecting of an agent to sell the property. The beneficiaries had taken time to provide their response • some issues had been experienced in selling the property because most buyers insisted on a building inspection report which indicated that the property needed underpinning. This had led to interested parties cooling off • the Trustee is a professional administrator of deceased estates • the Commissioner expects the executor of a deceased estate to make reasonable enquiries about matters that affect the administration of the estate • the Commissioner expects the executor of a deceased estate to act responsibly in relation to the taxation affairs of the deceased and of the estate • the Trustee should have been aware that there were conditions that had to be met if the sale of the property was to be exempt from the CGT provisions • the Trustee should have been aware that the CGT provisions might apply if the sale of the property was delayed beyond two years from the date the deceased passed away • the Trustee should have been aware that the sale date for the main residence purposes is when their legal ownership of the property ends, that is, when the sale contract is settled; and • the Trustee should not delay the sale of the property on the expectation of receiving the Commissioner's discretion. | Detailed Reasoning - Conclusion: The new title for the property was issued almost two years after the deceased had passed away. The Trustee had a number of months to dispose of the property after the new title had issued to ensure that it was sold within the two year period from the date the deceased passed away. While this is not a long period of time, given that the conversion of the title was in progress prior to the time the Trustee was appointed as the trustee of the deceased's estate, it is reasonable to expect that the Trustee would have undertaken the necessary actions in relation to getting the repairs to the property completed while waiting for the title conversion to occur so that the property would have been ready to put on the market as soon as the new title was issued. While it is reasonable for some repairs to be undertaken in relation to getting an inherited dwelling ready for sale, it is the time involved the getting the property on the market and the actions of the trustees and beneficiaries of the deceased's estate that we take into consideration when determining whether the Commissioner's discretion will be exercised. The fact that the estate did not have enough funds to cover the repairs should have been anticipated by the Trustee and an agreement with the Strata Management entered into to ensure that the repairs could be completed, and the property could be put on the market as soon as the new title had issued to ensure that it was sold within the two year period. The Trustee had consulted with the beneficiaries of the deceased's estate in relation to whether the repairs on the property should be undertaken prior to the property being put on the market and also which agent to engage to sell the property. However, the deceased's will gave their trustee the power to sell the property when and however they saw fit. Therefore, it is not viewed as necessary in this case for the Trustee to have consulted with the beneficiaries of the deceased's estate in relation to these issues, which had caused further delay in putting the property on the market. It has been submitted that the deceased's estate was of a complex nature. However, after reviewing the deceased's will, and taking into consideration that the Trustee is a professional administrator of deceased estates, we are not of the view that the deceased's estate was of a complex nature. Therefore, this is not a factor that the Commissioner would take into consideration when making the decision on whether or not to exercise his discretion to extend the two year period to dispose of the property After considering the facts of this situation, while we acknowledge that a significant period of time had passed before the new title had been issued, it is viewed that the choices made by the Trustee have contributed to delay in the disposal of the property, resulting in the settlement occurring over 30 months after the deceased passed away and more than 12 months after the new title had been issued. Therefore, it has been determined that the Commissioner's discretion will not be exercised to extend the two year period as it is viewed that the facts of this situation are not of a nature that would be acceptable for the exercising of the Commissioner's discretion. Note: the Commissioner has not been asked to determine whether a new CGT asset was acquired when the conversion from company title to community title was completed.