Private ruling: Capital gains tax - deceased estate – Commissioner’s discretion to extend the two year period to dispose of an inherited dwelling
Date of advice: 21 December 2017
Published: June 2018
Ruling period: Income year ending 30 June 2018.
Date scheme commenced: 1 July 2017.

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 for you to dispose of your ownership interest in the Property? | A1: No.

Relevant facts and circumstances: Prior to 20 September 1985, Person A was born. They were severely impaired and under a legal disability, with a mental age of a child. Person A resided at a property operated by Entity XYZ which supported people with intellectual disabilities to live in the community. Person A’s parent was Person B who purchase a property (the Property) after 20 September 1985. Person B made a Will a number of years after the Property was purchased which included the following: ● Person X to be appointed as executor, the trustee; ● Person X to receive all personal possessions and a sum of money; ● Person X’s sibling to receive a sum of money; ● You to receive a sum of money; ● Person C to a sum of money; ● If any of the above beneficiaries had not survived the Deceased, their share would form part of the residue of the Deceased’s estate; ● The Trustee of the Deceased’s estate would hold the residue of the estate on trust, being the residuary estate, with the proceeds of sale and the investments to pay out the Deceased’s debt, funeral, testamentary expenses, all probate estate death and succession duties and all other duties payable; ● The Trustee would have full care, guardianship, management and control of Person A and would make all decisions concerning their welfare, training and maintenance by Entity XYZ, or any institution of like nature, and direct that Person A shall not be moved from Entity XYZ’s premises unless the Trustee at their absolute discretion decided that it will be more beneficial for Person A to placed somewhere else upon the Trustee giving their express written permission to Entity XYZ, or any institution of like nature provided further that if these provisions are observed by the Entity XYZ to the satisfaction of my Trustee who shall be the sole arbiter in deciding that these provisions have been observed, then upon Person A’s death the residuary estate is bequeathed to Entity XYZ, or any institution of like nature where Person A was being cared for up to the time of their final illness and death. You and Person C were asked by Person B to be Person A’s guardians. Person B made a second will a number of years after the first will which included the following: ● You and Person C were to be appointed as trustees (the Trustees) of the Deceased’s estate and testamentary guardians of Person A ● The whole of the Deceased’s estate, subject to the payment of the Deceased’s debts, to be held on trust by the Trustees to set up a fund (the Fund) consisting of trust allocation and any income or asset added to the fund from time to time ● The Deceased wished, but did not bind, the Trustees to exercise their powers in relation to the capital and income of the trust to be used primarily for the maintenance, education, benefit, advancement in life or wellbeing of Person A as they thought fit; ● The Trustees may exercise any powers given by law in addition to: ○ accumulate income to the Fund so that it becomes part of the Fund; ○ determine, in the event of the Trustees disposing of or being deemed to have disposed of an asset, which part or parts of the capital or income of the Fund they will pay any income tax liability flowing from the disposal, or deemed disposal ● The Trustees in addition to any powers above may at their discretion exercise those powers for the sale of any assets in the Deceased’s estate without being liable for any loss caused by doing so, sell by public auction or private sale, for cash or on credit, postpone sale, or retain in its form of investment the Deceased’s death any part of the Deceased’s estate; ● Entity XYZ was to receive a sum of money; ● The Trust would terminate on Person A’s death; and ● Upon the termination of the Trust, subject to the payment of debts, the estate residue would be distributed in equal shares to each of the Trustees. The inventory of Person B’s property at the time the second will was created included the Property, money held in a bank account and their personal effects. The Property was Person B’s (the Deceased’s) main residence until they passed away during the following year. The Property commenced being rented out a number of weeks after the Deceased passed away. Probate on the Deceased’s estate was granted to the Trustees a number of months after the Deceased passed away. After probate was granted, the Property continued to be rented out with all rental income being deposited into Person A’s bank accounts, or later on, as advised by Person A’s financial manager. The rental money and monies available in bank accounts were used to provide for Person A. From around the time that probate was granted on the Deceased’s estate ongoing issues relating to Person A’s financial management and the management of their estate occurred which resulted in Guardian Tribunal hearings and the appointment of various parties on numerous occasions to oversee those roles. During the following year, the title of the Property was transferred into your name and Person C’s names as joint tenants. During the following month a caveat was applied for and granted over the Property. The Trustees had not attempted to remove the caveat on the Property, with the Property continuing to be used for rental purposes. Approximately 10 years ago, the Office of the Protective Commissioner lifted the caveat on the Property as the Guardianship Tribunal and the Office of the Protective Commissioner had suggested that the Property be sold to provide funds for Person A. The Property continued to be rented out after the caveat was removed. After a number of years Person A passed away. The Property continued to be rented out after Person A had passed away for around two years when it was put on the market. The Property was sold with settlement occurring around over two years after Person A had passed away. You have made a capital gain on the disposal of your ownership interest in the Property.

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 | Income Tax Assessment Act 1997 Section 118-200

Reasons for decision: Detailed Reasoning - Commissioner’s discretion to extend the two year period to dispose of an inherited property: In certain circumstances, section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the trustee or 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 or beneficiary of a deceased estate. In relation to properties acquired by a deceased person after 20 September 1985, but who passed away after that date, the property must: ● be the main residence of the deceased just before they passed away ● was not then being used for the * purpose of producing assessable income; and ● for the exemption to apply under section 118-195 of the ITAA 1997, the property needs to be disposed of by the trustee or the beneficiaries within two years of the date of death. In 1986, an explanatory memorandum (EM) 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 property to be eligible for the exemption. The intention behind this legislation was that the inherited property 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 property 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 to two years. 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 property in relation to CGT events that happened in the 2008-09 income year and later income years in accordance with the 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 property, 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 property 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 property 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. Where a trustee or beneficiary of a deceased estate cannot access a CGT exemption under section 118-195 of the ITAA 1997, section 118-200 of the ITAA 1997 may provide a partial exemption for the period that deceased owned the property. Application to your situation The following statements have been made: ● The administering of the Deceased’s estate had been incredibly complex and drawn out due to fractured relationships between the relevant parties, multiple Tribunal hearings, inefficient financial management and the Trustees attempting to do the best for Person A; ● The terms of the Deceased’s will created a life interest over the trust estate for the benefit of Person A, with the estate to be used for Person A’s benefit; ● The Trustees determined that a better return would be earned from renting the Property for Person A’s benefit rather than selling it and investing the proceeds from its sale in a term deposit account; ● The Trustees had wanted to sell the Property to finalise the administration of the Deceased’s estate, however an income tax return for the Deceased’s estate had incorrectly been lodged due to them not realising that the Property had passed to you and Person C, and that you and Person C were personally responsible for any tax issues arising in relation to the Property. We have taken the following into consideration when making our decision: Given the terms of the Deceased’s will, being that the administering of the Deceased’s estate would only be able to be finalised after Person A had passed away, it was always going to potentially be a lengthy process and period before the administration of the Deceased’s estate could be finalised and not due to the complexity of the Deceased’s estate. The Deceased’s estate only included the Property, a bank account and personal items of the Deceased, which by themselves would not be viewed as being indicative of a complex estate. While we accept that there had been ongoing issues in relation to Person A’s financial management and the management of Person A’s estate it was the Trustee’s fiduciary obligation to ensure that the Deceased’s estate was administered in the most expedient manner and that they would act responsibly in relation to the taxation affairs of the Deceased and the Deceased estate. The Deceased’s will gave the Trustees the authority and power to dispose of any of the assets in the Deceased estate, including the Property. The income and capital from the Deceased estate was to be used for Person A’s benefit during their lifetime, however there was not a life interest in the Property. Therefore, the Trustees had the power and authority to sell the Property, but had chosen not to. We appreciate that the Trustees were concerned with providing income for Person A’s benefit, however they made the choice not to sell the Property within the two years after the Deceased passed away to be eligible to disregard any capital gain made on the sale of the Property under the CGT provisions, and had chosen to rent it out. The title of the Property was transferred into your name, and Person C’s name as joint tenants a number of months after probate was granted. A caveat was lodged on the Property the following month which was not removed for many years, and was only removed approximately 10 years ago when the Guardianship Tribunal and the Office of the Protective Commissioner had wanted the Trustees to sell the Property. The Trustees had not attempted to have the caveat removed at any time and it was only removed due to the other parties wanting the Property to be sold. However, the Trustees did not sell the Property after the caveat was removed and continued to use the Property for rental purposes. The Trustees had not been involved in the caring of Person A on a day to day basis during the period from the date the Deceased passed away until Person A passed away, being over 16 years, so that had not contributed to the complexity of administering the Deceased’s estate. The Property continued to be used for rental purposes by you and Person C after Person A passed away. The Property was sold at auction and it was over 19 years between the date the Deceased passed away and the date settlement occurred, which is considered to be a significant period of time. After considering the facts of your situation, while we accept that while there were issues arising in relation to the administration of the Deceased’s estate, it is clear that the Commissioner’s discretion is meant to be limited to situations where the sale of the relevant property is prevented. The delay in the disposal of the Property was initially due to the Trustee’s actions, their inactivity in removing the caveat, and their choice to rent the Property rather than sell it. Activities could have been undertaken by the Trustees to attempt to sell the Property within the two year period after the Deceased had passed away. Additionally, while the title of the Property had been in your name and Person C’s names as joint tenants a number of months after the Deceased passed away, you made the choice not to sell the Property but to continue to rent it out, even after Person A had passed away. The Property was rented out for a total of around 19 years, firstly by the Trustees for over 16 years prior to Person A passing away, and then by you and Person C for around two years after Person A passed away, with settlement on the sale of the Property occurring more than 24 months after Person A passed away. No attempt to sell the Property had been made by the Trustees prior to Person A passing away, or by you and/or Person C after Person A passed away. After considering the facts of your situation it has been determined that the Commissioner’s discretion will not be exercised to extend the two year period to dispose of the Property as it is viewed that your situation is not of the 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 you ownership interest in the Property, the capital gain made on the disposal of your ownership interest in the Property cannot be disregarded and must be included in your 2017-18 income tax return.