Private ruling: CGT – deceased estate – Commissioner’s discretion to extend the two year period
Date of advice: 6 October 2017
Published: February 2018
Ruling period: Year ended 30 June 2017.
Date scheme commenced: 1 July 2016.

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? | A1: No.

Relevant facts and circumstances: The deceased purchased the property after to 20 September 1985 (the dwelling). The deceased passed away. The dwelling was the deceased’s main residence at the time of their death. The dwelling was not used for income producing activities and no income has been received from the dwelling after the passing of the deceased. The deceased’s Will named: ● Two of the deceased children as executors (the Executors) and ● Child A, Child B, Child C and Child D as beneficiaries (the Beneficiaries). A few months after the passing of the deceased Child A moved into the dwelling on the condition that they would purchase the dwelling from Child B, Child C and Child D. Three months later probate was granted. On advice from their solicitor the Executors decided to transfer the dwelling into the names of the Beneficiaries before the sale to Child A. Around six months after probate a notice of intention to distribute the estate was placed in newspapers. Approximately 18 months after the death of the deceased the title to the dwelling was transferred from the estate of the deceased to the Beneficiaries, each with a one quarter ownership interest in the dwelling. After the transfer of the title one of the Beneficiaries marriages was deteriorating to a point of separation. At the advice of the separated beneficiary’s solicitor the Beneficiaries made an arrangement to wait until the marriage issues of the separated Beneficiary were finalised before the sale of the dwelling to Child A. More than two years after the death of the deceased, the estranged spouse of one of the Beneficiaries placed a caveat on the dwelling. Over four years after the death of the deceased the caveat was lifted from the dwelling and the dwelling was sold to Child A. You made a capital gain on the sale of your ownership interest in the dwelling.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 118-130(3) | Income Tax Assessment Act 1997 section 118-195

Reasons for decision: Summary: The Commissioner will not exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time until DDMMYY. | Detailed Reasoning - Detailed reasoning: In certain circumstances, section 118-195 of the ITAA 1997 provides that the trustee 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 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 two years of the deceased’s death. 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. This discretion may be exercised in situations such as where: 1) the ownership of a dwelling or a will is challenged; 2) the complexity of a deceased estate delays the completion of administration of the estate; 3) 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 4) 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 property. In exercising the discretion the Commissioner will also take into account whether and to what extent the property is used to produce assessable income and for how long the trustee or beneficiary held the ownership interest in the property. Whether the Commissioner will exercise his discretion under subsection 118-195(1) of the ITAA 1997 will depend on the facts of each case. | Detailed Reasoning - Application to your situation: In this situation upon the death of the deceased the Beneficiaries decided that as it were the wishes of their parents for their spouse, Child A, to live in the dwelling after their death, the remaining Beneficiaries would sell their share in the Dwelling to Child A. Once this decision was made, Child A moved into the dwelling and maintained it as their main residence. Upon receiving advice from their solicitor the Executors decided to transfer the dwelling into the names of the Beneficiaries, each with a one quarter ownership interest in the dwelling. This process added additional time to the disposal process and by the time the dwelling was transferred to the Beneficiaries 18 months had elapsed from the date of death of the deceased. At that point the Beneficiaries still had six months to dispose of the dwelling within the two year time limit and claim the capital gains tax exemption available. After the transfer of the title one of the Beneficiaries marriages was deteriorating to a point of separation. Upon separation the estranged spouse placed a caveat on the dwelling. This caveat was placed on the dwelling five months past the two year period and has no impact on whether or not the dwelling could have been sold within the two year period. At the advice of the separated Beneficiary’s solicitor, the Beneficiaries made a personal family arrangement to wait until the marriage issues of the separated Beneficiary were finalised before the sale of the dwelling to Child A. At no stage during the two year period following the deceased’s death, were there any circumstances to prevent the dwelling from being disposed in a timely manner. It is clear that the Commissioner’s discretion is meant to be limited to situations where the owner is effectively prevented from selling the dwelling. The intention of the two year period is to allow the orderly and timely sale of deceased’s dwelling. Based on the information and documentation provided 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. As the Commissioner has not exercised his discretion to extend the two year period to dispose of the dwelling, any capital gain or capital loss made on disposal of the dwelling cannot be disregarded.