Private ruling: Capital gains tax – deceased estate – Commissioner’s discretion
Date of advice: 27 February 2018
Published: June 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. | Q2: Will the disposal of the properties be exempt from capital gains tax? | A2: No.

Relevant facts and circumstances: Sometime before 20 September 1985, the deceased and their spouse purchased a dwelling. This was the family home and they occupied it as their main residence. A few years later, the deceased and their spouse purchased the adjoining vacant block. The vacant block was not used to earn assessable income. The family used it to grow crops for personal use. The land attached to the dwelling was XXX square metres. The vacant block was XXX square metres. Prior to 20 September 1985, the deceased’s spouse passed away and both properties passed to the deceased as surviving joint tenant. The deceased continued to live in the dwelling as their main residence. Years later, the deceased passed away. Probate was granted shortly after. The executors to the deceased’s Will were two of her relatives. The dwelling and the vacant block were transferred into the names of the two relatives. One of the deceased’s other relatives, was handicapped and lived in the dwelling with the deceased up to the date of death. The deceased died suddenly of a heart attack and there were no arrangements in place for them to go into supported accommodation. The relative living in the dwelling asked the executors, if they could continue to stay in the dwelling with health support from community and family members. The relative had an informal agreement with family members to occupy the dwelling rent free until their death a number of years later. The dwelling and the vacant block have been sold, with settlement for both occurring 18 years after the deceased’s date of death.

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 | Income Tax Assessment Act 1997 subsection 118-195(1)

Reasons for decision: 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. In relation to properties acquired by a deceased person before 20 September 1985, but who passed away after that date, capital gains tax (CGT) does not apply to the dwelling if: ● You dispose of your ownership interest within two years of the person's death – that is, if the dwelling is sold under a contract and settlement occurs within two years. This exemption applies whether or not you use the dwelling as your main residence or to produce income during the two-year period. ● From the deceased's death until you dispose of your ownership interest, the dwelling is not used to produce income and is the main residence of one or more of: - a person who was the spouse of the deceased immediately before the deceased's death (but not a spouse who was permanently separated from the deceased) - an individual who had a right to occupy the dwelling under the deceased's will - you, as a beneficiary, if you dispose of the dwelling as a beneficiary. In 1986, an explanatory memorandum was released which introduced 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. 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 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 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. | 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 properties for the purposes of section 118-195 of the ITAA 1997. We have taken the following into consideration when making our decision: ● Your relative had resided in the dwelling with the deceased prior to the deceased passing away. ● Your relative asked the executors to the will, if they could continue to reside in the dwelling, with support from community and family members, rather than go into supported accommodation. ● You and the other executor (the executors) decided to allow your relative to continue to live in the dwelling. Your relative did not have a right to occupy the dwelling under the deceased’s will. ● Your relative continued to live in the dwelling until she passed away several years later. ● While there had been personal reasons not to sell, there had been no legal impediment and it had been the choice of the executors/beneficiaries not to sell the dwelling and the vacant block within the two year period from the date the deceased passed away. ● The executors should have been aware that there were conditions that had to be met if the sale of the dwelling was to be exempt from the CGT provisions ● We would have expected that at the time the choice not to sell the dwelling within the two year period had been made, the executors would have realised that making that choice would potentially render the exemption unavailable to you, and the consequences of that choice. ● The executors should have been aware that the CGT provisions might apply if the sale of the dwelling was delayed beyond two years from the date the deceased passed away. ● The vacant block was registered on a separate title, and could have been sold separately to the dwelling. ● The deceased’s estate was not 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; and ● Settlement on the disposal of the dwelling and the vacant block did not occur until over 18 years after the deceased passed away. | Detailed Reasoning - Conclusion:: After considering the facts of this situation, while we accept that there had been issues arising as a result of your relative’s housing and the difficulty associated with finding alternate supported accommodation, 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 delay in the disposal of the dwelling and the vacant block was contributed to by the actions and choices of the executors in response to your relative’s circumstances. Activities could have been undertaken to ensure that both properties had been disposed of within the two year period after the deceased had passed away. Once probate had been granted, you had choices as to how to proceed with the administering of the deceased’s estate and the disposal of the dwelling and the vacant block within the two year period to be able to disregard any capital gain made on the disposal of the property. While we acknowledge and appreciate the circumstances in relation to your relative’s disabilities and supported accommodation requirements, it was ultimately the decision of the executors of the deceased estate, to allow your relative to continue to reside in the dwelling, and to not sell it within the two year period after the deceased passed away. The delay in the disposal of the dwelling was not due to any legal impediment, but as a result of the actions and choices of the executors. Since the deceased passed away, the executors have allowed the dwelling to be used primarily as your relative’s residence rather than organising to sell it in an orderly manner. The choice to allow your relative to continue to reside in the dwelling, should not have prevented the vacant block from being sold. The period of time from the date the deceased passed away until the dwelling and the vacant block were sold was over 18 years. This is considered to be a significant period of time to dispose of an inherited property. Consequently, the Commissioner considers that there were no legal or physical impediments that prevented the disposal of the dwelling or the vacant block within the two year period from the date the deceased passed away. After taking into consideration the facts of your situation, the Commissioner has determined that he will not exercise his discretion to extend the two year period to dispose of your ownership interest in the properties. As the Commissioner has not exercised his discretion to extend the two year period to dispose of the deceased’s properties, any capital gain or capital loss made on the disposal of your ownership interest in the dwelling and the vacant block cannot be disregarded and must be included in your 2015-16 income tax return. | Detailed Reasoning - Cost base of asset from a deceased estate: If the deceased acquired the asset before 20 September 1985, the first element of your cost base and reduced cost base (that is, the amount taken to have been paid for the asset) is the market value of the asset on the day the person died. Remember that the cost base is made up of five elements, including costs of owning the asset. Information about what each element includes can be found on our website ato.gov.au by searching using the quick code QC 17161 . | Detailed Reasoning - CGT discount: As you are an individual, you disposed of the dwelling and vacant land after 21 September 1999, you held the land for at least 12 months, and provided you do not calculate your cost base with reference to indexation, any capital gain made on the disposal is a discount capital gain. This means you are entitled to reduce the capital gain by 50% when working out your net capital gain.