Private ruling: Discretion to extend the 2 year period
Date of advice: 27 April 2018
Published: July 2018
Ruling period: Year ended 30 June 20XX.
Date scheme commenced: 1 July 20XX.

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.

Relevant facts and circumstances: The Deceased and their spouse purchased the dwellings before 19 September 1985 (the Dwellings). The Dwellings are spread over a number of Lots, with Lot A and Lot B both containing two separate titles. A number of years later the Deceased’s spouse passed away. Over the ownership period of the Dwellings various family members and close friends have rented and occupied the Dwelling located at Lot B. Approximately four years before the Deceased passed away Child B moved into the Dwelling located at Lot B. The Deceased passed away. The Dwelling located at Lot A was the Deceased’s main residence at the time of their death. The Dwelling was used for income producing activities and income has been received from the Dwellings after the Deceased’s death. The Deceased was survived by four children: ● Child A; ● Child B; ● Child C; and ● Child D (the beneficiaries). Child A suffers from various health conditions and intellectual impairment. The Deceased’s will appointed Child B, Child C and Child D as executors (the executors) of the Deceased’s estate. Approximately six months after the Deceased passed away Probate was granted to the executors. Following the death of the Deceased a dispute arose between the executors of the Deceased’s estate as to whether the Dwellings should be sold or appropriated (apportioned) to the beneficiaries. Child B and Child C wanted to retain the Dwellings and Child D wanted the Dwellings sold. Further, as an attorney for Child A, Child D was concerned that any apportioning of the Dwellings would not be in Child A’s best interest given Child A’s need for funds to move into full time care. Approximately 18 months after the Deceased passed away Solicitor A acting for Child D wrote to the Deceased estate’s accountants to advise them of the current status of the estate as follows: ● Child A requires a large degree of personal care therefore we should sell the Dwellings and use the proceeds to purchase alternative accommodation and care services; ● The Dwellings lack return on capital as an investment and lacks the liquidity needs of all of the beneficiaries; and ● An adjustment should be made to the final distribution as Child B should be paying rent. A short time later Child C advised Child D that Child C and Child B have no intention of selling the Dwellings and that the Deceased would not want Child B to pay any rent to live at the Dwelling located at Lot B. A few months later Child A was assessed by a Government Organisation and was deemed to no longer be able to live alone due to age and decline in intellectual capacity. Approximately two and a half years after the Deceased passed away both Child B and Child C instructed Lawyers BC to represent their interests in the Deceased’s estate. Lawyers BC advised Solicitors A that they propose to apportion the Deceased’s estate, where Lot B would be transferred to their respective trusts and Lot A would be transferred to Child A and D’s respective trusts. A short time later Child D their solicitor to agree to the proposal put forward by Child B and Child C, in principal, on certain conditions as follows: ● Separate valuations were obtained for each Dwelling; ● Any deed of appropriation would take into account lost revenue from Child B and Child C’s earlier refusal to sell the Dwellings; and ● The issue of rental adjustments would be incorporated into the deed Approximately three years after the Deceased passed away Child D sought more advice from their solicitor about Child B and Child C’s proposed apportionment. Child D was uncertain this was in the best interest of Child A. Child D was advised by their solicitor that one possible solution was for the executors of the Deceased’s estate to resign as executors and trustees and an independent administrator be appointed. A few weeks later this was put to Child B and Child C. Around the same time Child A moved in with Child D’s family leaving Lot A vacant. The next month Child D emailed their Solicitor and Child C with instructions as stated: ● There was no immediate need to sell the Dwelling; ● Child B needed to pay market rent; and ● If Child B refused to pay market rent, then Child D would seek direction from the courts. Child D started correspondence with Child B and Child C regarding the appointment of an independent administrator. Child A’s level of care has increased therefore Child D has started to submit applications to permanent care facilities. In order to fund Child A’s admittance, Child A will require a significant cash distribution from the estate. A few weeks later Child B and Child C proposed to buy out Child A and Child D’s interest in the Deceased’s estate and are agreeable to the removal of the current executors. Child D’s solicitors responded stating: ● That for Child B and Child C to buy out Child A and Child D’s interest in the Deceased’s estate that they would need to pay the transfer duty on the transfer of the Dwellings. ● If they are proposing purchasing the Dwellings from the Deceased’s estate there is a legal prohibition on executors acquiring Deceased estate assets unless all beneficiaries consent to the purchase. ● Given Child A’s declining health and intellectual capacity it would be unreasonable to expect Child A to provide a fully informed consent. They could seek sanction from the court for the proposed purchase, however this would not be practical. ● Given this the only way forward would be to sell the Dwellings. Approximately six months later Child D applied to the Courts to revoke probate and for the appointment of an independent administrator (Administrator). A short time later an Administrator was appointed by the Courts for the Deceased’s estate. The Administrator advised Child A to receive independent legal advice about their interests in the Deceased’s estate before the Administrator could make a decision as how to proceed with the administration of the Deceased’s estate. Child A obtained independent legal advice and as a result gave formal notice to the Deceased’s estate of Child A’s intention to make a claim against the Deceased’s estate for adequate provision. Approximately four years after the death of the Deceased Child A moved into full time care. Approximately 12 months after the Administrator was appointed they informed the beneficiaries that due to Child A’s claim and the fact no agreement could be made they intend to sell the Dwellings. Approximately five years after the death of the Deceased the Dwellings were sold and settlement occurred on the Dwellings a short time later.

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. | 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 if: ● the property was acquired by the deceased before 20 September 1985, or ● the property was acquired by the deceased on or after 20 September 1985 and the dwelling was the deceased’s main residence just before the deceased’s death and was not then being used for the purpose of producing assessable income, and ● your ownership interest ends within two years of the deceased’s death. The Commissioner has discretion to extend the two year time period where the trustee or beneficiary of a deceased estate's ownership interest ends after two years from the deceased's death. This discretion may be exercised in situations such as where: 1. the ownership of a dwelling or a will is challenged; 2. the complexity of a deceased estate delays the completion of administration of the estate; 3. 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 4. 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 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 circumstances: In this case following the death of the deceased there was a dispute between the three executors, Child B, Child C and Child D, on how to distribute the pre CGT properties to the four beneficiaries. The matter of distribution was a key factor in the dispute as the fourth beneficiary, Child A, needed to be placed in long term full time care and needed a significant cash disbursement from the Deceased’s estate for this to happen. Child D, acting as attorney for Child A, was unwavering in his belief that the properties should be sold together to yield the most money for the benefit of the beneficiaries and in particular Child A. Child B and Child C disputed this position; Child B had been living in one of the properties from 2008 and both believed that the Deceased would not want Child B to have to pay any rent. As this dispute could not be resolved Child D applied to the Courts to have the executors relinquish their status as executors and an independent administrator be appointed by the Courts. From the time the independent administrator was appointed to the time the properties were sold was approximately 12 months. It is up to the executors to dispose of the Deceased’s estate assets in a timely manner, if there was any conflict between the executors then the Deceased’s estate should have been placed in independent administration as soon as possible. The executors of the Deceased estate prolonged the sale of the properties by approximately four years due to their inability to negotiate and settle the disbursement of the properties. A dispute between executors is not seen as an event happening outside the control of the executors and given the fact that there has been no evidence provided to suggest that the deceased’s estate was complex in nature or an unforeseen or serious circumstance applied to the executors out of their control, 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.