Private ruling: CGT - deceased estate - Commissioner’s discretion to extend the two year period
Date of advice: 16 October 2017
Published: March 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

Relevant facts and circumstances: Individual A acquired a unit after 20 September 1985 (the unit). Individual A passed away in 201X (the deceased). The unit was the deceased’s main residence. Prior to the deceased’s passing, ongoing water leaks and building defects associated with all the units within the complex, resulted in legal action being undertaken by the unit developer against the builder. These court proceedings ordered the builder to rectify the incomplete and defective works. The builder did not undertake any repairs. Over a number of years, the Body Corporate of the unit owners complained to a building authority which had a role in investigating building defects. The Body Corporate and developer attempted repairs to part of the building sometime later, prior to the deceased’s passing. After the deceased passed away, you were advised by a local real estate agent that units in the complex were difficult to sell or rent due to the mould and water problems and new buyers were cautious of having to pay for any rectification works. These building defects were commonly known to buyers and forced the sale price of the units down before the rectification works were completed. This building authority took legal action against the builder and developer over a number of years after the deceased’s passing. Later, the Body Corporate and unit owners investigated and met with contractors to obtain quotations to undertake the rectification works. Throughout the time in which the building dispute was being investigated and litigated in court and the Body Corporate and developer were investigating possible repair options, you rented out the unit. The trustee of the deceased’s estate, as well as other unit owners recently made a contribution, which along with other funds held by the Body Corporate was used to fund rectification works. These rectification works were completed later that same year. The unit was placed on the market for sale in early 201Y, with settlement occurring shortly after.

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: 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 DDMMYY. | Detailed Reasoning - Detailed reasoning: 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 trustee or beneficiary of a deceased estate to make reasonable enquiries about matters that affect the administration of the estate. You made a conscious decision to rent out the unit at a commercial rate from the date of the deceased’s death until settlement of the contract of sale. Your reason for continuing to rent out the unit and not sell it was in relation to the perceived decline in value of the unit due to its defects. You did not obtain a market valuation for the unit at the date of the deceased’s death. You have provided no evidence that the unit was not fit for habitation or in need of urgent repairs over the period that you owned it, but rather, it was used to obtain rental income during this period. During the time you retained ownership of the unit, it increased in value and you realised a higher sale price. There was no legal or physical impediment that contributed to the delay in disposing of the unit. The deceased’s estate was not of a complex nature. Therefore, these are not 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 unit. Settlement on the disposal of the property did not occur approximately four 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.

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