Private ruling: Capital gains tax - deceased estate - 2 year discretion
Date of advice: 25 February 2019
Published: May 2019

Ruling: Q1: Will the Commissioner allow an extension of time for you to dispose of your ownership interest in the dwelling and disregard the capital gain or loss you make on disposal? | A1: No

Relevant facts and circumstances: The deceased passed away in 201B. The deceased owned a property (the dwelling). The dwelling was the deceased’s main residence. The land size is not more than 2 hectares. Probate was granted in 201C. The will of the deceased provided that you were entitled to an equal share in the estate with your siblings, (‘A’) and (‘B’) ‘B’ was named as the primary executor of the estate. Title to the dwelling was transferred to the beneficiaries in 201D. ‘B’ and their family moved into the dwelling to assist the deceased in 201A. ‘B’ and their family have considered purchasing the dwelling from you and ‘A’ since the death of the deceased. ‘B’ experienced a medical condition around the time of the death of the deceased. A valuation of the dwelling was undertaken in 201E. ‘B’ and their family agreed to purchase the dwelling from you and ‘A’ however experienced some difficulties in selling a property (property ‘A’) that they owned in order to fund the acquisition of the dwelling. ‘A’s parent became aware that property ‘A’ was for sale and expressed an interest in purchasing the property. In order to finance the acquisition of this property A’s parent was required to sell their own dwelling. The various local property markets experienced a downturn and as a result it took longer than expected to complete the respective sale transactions. Settlement took place in 201F.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 118-195 | Income Tax Assessment Act 1997 subsection 118-195(1)

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 for you to dispose of your ownership interest in the dwelling and disregard the capital gain or loss you make on disposal. | 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 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. In this case the Commissioner has decided not to exercise his power to extend the two year period available to the beneficiary of the deceased estate to dispose of the inherited property for the purposes of section 118-195 of the ITAA 1997. We have taken the following into consideration when making our decision: ● ‘B’ has resided in the property prior to the deceased passing away in 201B. ● You, ‘A’ and ‘B’ had inherited an equal ownership interest in the property from the deceased. ● The beneficiaries were unable to agree to dispose of the property after your parent had passed away. ● ‘B’ experienced a medical condition around the time of the death of the deceased. ● ‘B’ continues to live in the property. ● There have been some delays in obtaining finance to fund the respective acquisitions by family members. ● There has been no legal impediment since probate was obtained in selling the dwelling and it has been the choice of the beneficiaries not to sell the property within the two year period from the date the deceased passed away. ● The beneficiaries 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 CGT 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 the beneficiaries would have realised that that choice would potentially render the exemption unavailable, and the consequences of that choice. ● The beneficiaries 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 ● 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 property occurred more than 3 years from the date of death. After considering the facts of this situation, while we accept that there had been issues arising as a result of financing the acquisition of the dwelling, it is clear that the Commissioner’s discretion is meant to be limited to situations where the owner is effectively prevented from selling the property. The delay in the disposal of the property was contributed to by the actions, choices, and inactivity of the beneficiaries of the deceased’s estate. Activities could have been undertaken earlier ensure that the property had been disposed of within the two year period after the deceased had passed away. While we acknowledge and appreciate the circumstances it was ultimately the decision of the beneficiaries when the title of the property had been transferred to them, to allow ‘B’ to continue to reside in the property and to not sell the property within the two year period after the deceased passed away. The period of time from the date the deceased passed away until the property settled is more than 3 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 property 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 the property.