Private ruling: Capital gains tax - deceased estate - 2 year discretion
Date of advice: 5 December 2016
Published: January 2017
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 until settlement? | A1: No.


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 24 February 2017. | Detailed Reasoning - Reasons for decision: 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 property that passed to them in their capacity as trustee 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 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. 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: The Commissioner expects a beneficiary of a deceased estate to make reasonable enquiries about matters that affect the administration of the estate. You 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. We would have expected that at the time the choice not to sell the property within the two year period had been made, that you would have realised that that choice would potentially render the exemption unavailable to you, and the consequences of that choice. You 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. You have provided some personal circumstances in relation to your children that they were experiencing during your ownership of the dwelling, however the choice to allow your children to reside in the dwelling has not prevented you from selling the property as it was a family arrangement. 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. Settlement on the disposal of the property did not occur until a number of years after the deceased passed away. Having considered the relevant facts, the Commissioner will not apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit. The normal capital gains tax (CGT) rules will apply to the disposal of the property.

The deceased acquired a dwelling prior to 20 September 1985. (The dwelling) | The deceased passed away in 2009. (The deceased) | The dwelling was transferred to you and your sibling, (‘A’) in 2010 as beneficiaries. | The dwelling was the deceased’s main residence. | The dwelling has not been used to produce assessable income. | You and ‘A’ established a joint account to maintain the property and contributed $X per month to cover the costs of maintenance, rates and other expenses. | Your child, ‘B’ occupied the dwelling in 2009 until 2012. ‘B’ suffered from some medical conditions during this period and was unable to contribute rent payments or maintain the dwelling. | Your child, ‘C’ occupied the dwelling from 2012 until early 2016. ‘C’ also suffered from medical conditions which made the payment of rent and maintenance of the dwelling difficult. | You and ‘A’ made the decision to sell the dwelling as the maintenance had become too burdensome. | You and ‘A’ did not rent the dwelling to tenants after ‘C’ moved out because you did not think that potential tenants would maintain the property appropriately. | You entered into a contact to sell the dwelling in 2016. | Settlement will occur in 2017. | You were unaware of the capital gains tax consequences of not disposing of the dwelling within two years of the date of death of the deceased.