Private ruling: Capital gains tax - deceased estate - Commissioner's discretion
Date of advice: 20 January 2016
Published: March 2016
Ruling period: Income year ending 30 June 2016.
Date scheme commenced: The scheme has commenced

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 the inherited property? | A1: No.

Relevant facts and circumstances: Documentation has been provided with the request which form part of, and are to be read in conjunction, with this description. The deceased purchased the property (the property) before 20 September 1985. The property consists of two titles, with a dwelling being located on one of the titles (the dwelling). The dwelling was the deceased's main residence until they passed away after 20 September 1985. The deceased's spouse had predeceased them, and they did not have any children. No members of the deceased's extended family were aware if the deceased had a will when they passed away. The deceased's extended family members attended the property around three months after the deceased had passed away, to locate the deceased's Will and ascertain details of the assets and liabilities of the deceased. During that visit the family members located a homemade handwritten Will. The deceased's Will dated before 20 September 1985, bequeathed their estate to their extended family members. The deceased's Will, named a number of their extended family as the Executors of the deceased's estate. However, one of the named Executors had predeceased the deceased. The family members also found a letter in the property from a solicitor that indicated that a more recent will may exist. The family members investigated whether there was a more recent will. The searches undertaken by the deceased's family were unable to locate a more recent will, and the Executors contacted a legal firm (the Legal Firm). The Executors had an appointment with the Legal Firm around 13 months after the deceased had passed away to ascertain their roles as Executors and to determine what needed to be done by them in order to administer the deceased's estate. Following the appointment, the Legal Firm commenced the discovery process for the identification of the precise assets and liabilities of the deceased. Draft probate documents were prepared by the Legal Firm around 19 months after the deceased had passed away. Around 22 months after the deceased had passed away, the Executors attended the offices of the Legal Firm to sign the Probate and ancillary documentation. The application for Probate was lodged shortly after the documentation had been signed by the Executors. A number of days later, the Probate Office issued a requisition in relation to the Probate application due to the deceased's Will being a handwritten will with various alterations. In the following month, information was provided to the Probate Office to satisfy the requisition. Probate was granted around 23 months after the deceased had passed away. The Executors expressed that they wished to wait the six month statutory period prior to distributing the estate to the beneficiaries. The dwelling had remained vacant since the deceased passed away and was not used to produce assessable income. Initially the members of the deceased's family had wanted to keep the property however it proved not to be feasible to keep the property. It had been informally mentioned to the Executors that potential buyers (the Purchasers) were interested in purchasing the property and negotiations had commenced around 29 months after the deceased had passed away. The Executors had undertaken investigation of the potential sale price of the dwelling given that they were contemplating the sale of the dwelling via a private sale and had met a real estate agent at the property in the same month that the negotiations had commenced to obtain an appraisal of the property and information on selling the property. The Purchasers had made a firm offer to purchase the property, with a verbal agreement occurring around 30 months after the deceased had passed away, with a cash settlement to occur at after an agreed period had passed from the exchange of the contract. A delay in the settlement of the property was caused due to information requested by the Legal Firm, which had taken longer than expected. The Legal Firm are acting in the conveyance of the sale of the property are awaiting, the signing of the contract of sale by the Purchasers. The Executors signed the contract of sale of the property around 33 months after the deceased had passed away. Settlement on the sale of the property is scheduled to occur around 34 months after the deceased had passed away. The following statements have been made in the request: • The Executors were unaware of their position as the Trustees of the deceased's estate as they had not located the deceased's Will • The Executors live a fair distance away from where the property is located • Both are involved in positions within their districts and are required to remain in their local areas during the certain months of the year. As a result, they are only able to visit the deceased's dwelling and the Legal Firm occasionally • The Executors had a difficult task of clearing out the property and dealing with its contents. Some items within the deceased's Will were unable to be located and it took great effort by the Executors to secure those items. An item of the deceased was hidden in the dwelling and this resulted in the Executors having to lodge an Amended Affidavit of Executors and Supplementary Inventory of Assets and Liabilities in relation to the deceased's estate with the Probate Office around 31 months after the deceased had passed away • The beneficiaries of the deceased's estate had agreed to include a further beneficiary to receive a share of the proceeds from the sale of the property. Necessary paperwork had to be prepared and signed by all of the beneficiaries of the estate to enable this to occur • One of the Executors suffers from a chronic medical condition and is unable to travel vast distances. A round trip from their home to the Legal Firm's office takes over five hours. As a result, it had been difficult them to attend the Legal Firm's office • One of the Executors is a committee member on the local services and is required to undertake intense training of members. They are in control of the radio system for the services and they are unable to leave this role during certain times of high alert. Accordingly, they had to wait for an appropriate time to be able to travel to where the property is located • The circumstances of this case warrants the granting of an extension of time on the grounds that the situation that both Executors had been facing had been beyond their control • The Executors are not the deceased's direct descendants and the deceased's Will was established over 30 years ago, it is understandable that it took a considerable period of time before the trustees became aware of their roles as Executors of the Will • Based on the Executor's personal circumstances, good intention and prompt attention to the estate once they were aware of it, it would be fair and equitable to grant the extension; and • If the deceased had disposed of the property immediately before her death, the property would be exempt due to its pre-capital gains tax (CGT) and main residence status.

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 118-195

Reasons for decision: Detailed Reasoning - Commissioner's discretion to extend the two year period to dispose of an inherited dwelling: 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 by Parliament 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. 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 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. 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 income 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. | Detailed Reasoning - Application to your situation: 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 deceased had passed and their Will was found by the deceased's family members in around three months after the deceased passed away • The deceased's family had unsuccessfully searched for a more recent will. When a more recent will had not been located, the Executors engaged the services of a legal firm around 13 months after the deceased passed away • Draft probate documents were prepared around six months after the Legal Firm had been engaged • The Executors attended the offices of the Legal Firm to sign the Probate and ancillary documentation, three months after the Draft probate documents had been prepared • The application for Probate was lodged around 22 months after the deceased had passed away. However, the Probate Office issued a requisition and information was provided to the Probate Office during the following month to satisfy the requisition. • Probate was granted around 23 months after the deceased had passed away • The Executors knew that they were named as the executors of the deceased's estate following the finding of the Will around three months after the deceased had passed away. However, they had not engaged the services of a legal representative to assist the finalising of the administration of the deceased's estate until about 13 months after the deceased had passed away • The distance each Executor had to travel from their home to the deceased's property was known at the time the deceased passed away. Also one of the Executors had an existing health issue. It therefore would have been known that those circumstances would potentially present issues in finalising the deceased's estate. Given this, it would not have been unreasonable for them to have considered not accepting the responsibility of acting as the Executor's of the deceased's estate, but they had made the choice to continue in that role • A replacement executor/s could have been appointed if both/either of the Executors were unable to attend to their duties as the Executors of the deceased's estate • We accept that one of the Executors had health issues, and that the Executors lived a significant distance away from the deceased's property and the office of the Legal Firm. However, they could have had their appointed legal representative act on their behalf to undertake work in relation to the administration of the deceased estate. This could have been undertaken without the requirement for them to physically attend their legal representative's office with correspondence sent via various channels • Even if the Executors had commitments in relation to local services, they would have had a significant period of each of the two years after the deceased had passed away to attend to the administering of the deceased's estate when it was not certain periods. • The deceased's family had wanted to keep the property until it had been determined that it was not feasible. It would be reasonable to conclude that the deceased's family had not been actively seeking to sell the property while they had the intention to keep it • The property was not put on the market with a registered real estate agent and based on the information provided it was not until the Purchasers had approached the Executors in relation to the purchasing of the property that any activities were undertaken in relation to the disposal of the property. The deceased had passed away 29 months prior to the Purchasers approaching the Executors and expressing that they were interested in buying the property • The Executors expressed that they wanted to wait the six month statutory period prior to distributing the estate to the beneficiaries. However, as soon as Probate has been granted the Executors of a deceased's estate can make distributions to the beneficiaries of a deceased estate. It had been the Executor's choice not to dispose of the property and distribute the sale proceeds to the beneficiaries • While the property had been a pre-CGT asset in the hands of the deceased, under the CGT provisions they are viewed as having been acquired by the Trustee and/or the beneficiaries on the date the deceased passed away. Therefore, in this case as the deceased passed away, the property is viewed as having been acquired by the Executors on that date and its pre-CGT status in the hands of the deceased no longer applies • The two year period to dispose of an inherited property was introduced by Parliament to allow a timeframe that it considered reasonable for the Trustee/beneficiaries of a deceased estate to prepare and sell the inherited property. Other than the statement that some items within the deceased's Will were unable to be located, we have not been provided with an explanation for why the Executors had difficulty in cleaning out the property. The fact that an item was found and an Amended Affidavit and a Supplementary Inventory of Assets and Liabilities in relation to the deceased's estate had to lodged as a result of finding the item would not have prevented the Executors from disposing of the property within the two year period after the deceased passed away. • Those documents were lodged around 31 months after the deceased had passed away, which was after the verbal agreement to sell the property to the Purchasers, which had been made around 30 months after the deceased had passed away. Therefore, it cannot be viewed that this issue has delayed the disposal of the property • Settlement on the disposal of the property is scheduled to occur around 34 months after the deceased passed away • We have not been advised of any legal impediment which prevented the sale of the property • We have not been advised of any challenge to the deceased's will which caused the delay in the disposal of the property. While the beneficiaries of the deceased's estate had agreed to include a further beneficiary to receive a share of the proceeds from the sale of the property, and the necessary paperwork had to be prepared and signed by all of the beneficiaries of the estate to enable this to occur, this was a choice made by the beneficiaries of the deceased's estate. The property could still have been sold and with the sale proceeds being held by the Executors until they could be distributed to all of the beneficiaries, including the additional beneficiary • We have not been advised of any reason why the Executors could not attend to the administration of the deceased's estate and sell the dwelling within the two year period • The information and documentation provided does not support 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 • The Executors 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 capital gains provisions • The Executors should have been aware that the capital gains tax provisions might apply if the sale of the property was delayed beyond two years from the date the deceased passed away; and • The Commissioner expects the executor of a deceased estate to make reasonable enquiries about matters that affect the administration of the estate and to act responsibly in relation to the taxation affairs of the deceased and of the estate. | Detailed Reasoning - Application to your situation:: It is clear that the Commissioner's discretion is meant to be limited to situations where the owner is effectively prevented from selling the property. In this case, the settlement on the disposal of the inherited property is scheduled to occur over 30 months after the deceased had passed away. The delay in the administration of the deceased's estate has been contributed to by the choices, and actions, of the Executors of the deceased's estate who could have undertaken other activities to ensure that the dwelling had been disposed of within the two year period after the deceased had passed away. Therefore, 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.