Private ruling: Capital gains tax, deceased estate 2 year discretion
Date of advice: 28 May 2018
Published: July 2018
Ruling period: Period ending 30 June 201X
Date scheme commenced: 1 July 201X

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act (ITAA 1997) and extend the two year period until settlement. | A1: No

Relevant facts and circumstances: The deceased’s date of death (DOD) was xxxx. The deceased acquired the property before xxxx. The dwelling was the deceased’s main residence until DOD. The dwelling was never used to produce assessable income. The deceased had a Will and the executors are xxxx. The deceased’s children are the beneficiaries. The date of probate was xxxx. Annexure B ‘Inventory of Property’ signed xxxx shows estimated value of the property at $xxxx. Initially the property was not marketed for sale as some of the beneficiaries indicated they knew property developers and persons interested in redeveloping the property. In xxxx was diagnosed with medical condition throughout xxxx. In xxxx a written offer was received from a xxxx property developer in the form of various options and direct sale. The beneficiaries were not happy with the offers received and waited for further offers. In xxxx the executors and the beneficiaries held a meeting and a decision was made to sell the property privately. In xxxx the executors erected the sign on property indicating the property was for sale. In xxxx developer again approached the executors with a new option. In xxxx there were discussions with xxxx but no agreement was settled on. From xxxx a number of people contacted the executors about the purchase of the property, including xxxx of beneficiaries in the business, but never led to anything. In xxxx were contacted by interested persons with a “Put and Call Option”. On the xxxx (22 months after DOD) the “Put and Call Option” contract was signed by the executors and the purchasers. One of the conditions of this option was the vendor consents to the purchaser lodging a caveat following the exchange of the option. The option also states “the purchaser or nominee may extend the time for the exercise of this option a further six months by serving on the vendor’s solicitors prior to the expiry of the option a written notice pursuant to this clause”. In or about xxxx the executors sought legal advice. The property was subject to a second caveat until a lapsing notice issued causing the caveat to be removed. In xxxx the executors regained control of property. In xxxx the executors enter into agreement xxxx to market property for sale. On the xxxx the property’s sale for $xxxx was settled.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-195 | Income Tax Assessment Act 1997 section 118-195(1) | Income Tax Assessment Act 1997 section 128-15

Reasons for decision: Summary: 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 prior to 20 September 1985, but who passed away after that date, 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, or within a longer period allowed by the Commissioner. 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 section 118-195(1) of the ITAA 1997 will depend on the facts of each case. | Detailed Reasoning - Application to your situation: The property wasn’t listed for sale as soon as practicable as various beneficiaries indicated they knew property developers and persons interested in redeveloping the property. There were offers made to purchase the property by various parties, but the beneficiaries declined as they were not happy with the offers and waited for further offers. The executors entered into a “Put and Call” option 22 months after the DOD of deceased. The purchasers continued to extend and delay settlement until legal advice sought by the executors to regain control of property. Settlement on the disposal of the property did not occur until over 3 years after the deceased’s DOD. While we acknowledge and appreciate the circumstances in relation to xxxx’s medical issues (these were within the two year period), the estate was not complex and there were no legal challenges to the will that prevented the sale. It is considered that the property could have been sold within the required 2 year period albeit at a price less than the amount the property finally settled at. The delay in the disposal of the property was contributed to by the actions and choices made by the executors and beneficiaries of the deceased’s estate. These actions and choices were within the beneficiaries’ control. While we appreciate the circumstances, the hope for a higher price for the property is of a different nature to the situations in which the Commissioner can exercise his discretion. Having considered the relevant facts and circumstances, the Commissioner is unable to apply his discretion under section 118-195(1) of the ITAA 1997 to allow an extension to the two year time limit.