Private ruling: Capital gains tax – deceased estate – Commissioner’s discretion
Date of advice: 6 July 2016
Published: August 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

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 facts and circumstances: The arrangement that is the subject of the private ruling based on the documentation provided, and those documents form part of, and are to be read with this description. The deceased acquired a dwelling (the dwelling). The deceased passed away in 2006 (the deceased). The dwelling was the deceased’s main residence. The dwelling has not been used to produce assessable income. The beneficiaries of the estate were the deceased’s children, (‘A’), (‘B’), (‘C’) and (‘D’) (deceased) The deceased left a will; however you obtained legal advice that letters of administration should be applied for with the will annexed as this would be the best way to administer the estate. ‘D’ was appointed administrator. Title to the dwelling was transferred to the beneficiaries as tenants in common in equal shares after a period of time. ‘D’ resided in the dwelling for a number of years prior to the decease passing away. ‘D’ was not provided with a life interest or a right to reside in the dwelling in the will of the deceased. The deceased stated that it was their wish that ‘D’ be permitted to reside in the dwelling until such time as alternative accommodation could be obtained. ‘D’ suffered from several medical conditions. ‘D’ paid for the outgoings for the dwelling. ‘D’ did not pay any rent to any beneficiary. ‘A’ attempted to resolve the issue of the ownership of the dwelling in 2008. Legal advice was obtained in 2012 relation to preparing an application to appoint a statutory trust for sale of the dwelling. The beneficiaries did not prepare an application to enforce the sale of the dwelling. ‘D’ passed away in 2014 without the ownership of the dwelling being resolved. The property was listed for sale 2015 and settlement occurred 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 | Income Tax Assessment Act 1997 subsection 118-195(1) Explanatory memorandum to the Taxation Laws Amendment Bill (No.9) of 2011 (Cth)

Reasons for decision: Summary: 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: In this case the Commissioner has decided not to exercise his power to extend the two year period available to the Trustee 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: ● ‘D’ had resided in the property with your parent prior them passing away in 2006. ● ‘D’ had inherited an equal ownership interest in the property from your parent. ● The beneficiaries were unable to agree to dispose of the property after your parent had passed away. ● ‘D’ was suffering from several medical conditions including a mental illness. ● The family had considered enforcing the sale of the dwelling however decided not to pursue the sale of the property. ● ‘D’ continued to live in the property until they passed away in 2014. ● While there had been personal reasons not to sell, there had been no legal impediment and it had 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 to them, 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 beneficiaries had options that they could pursue so that they could realise their inheritance, such as having the court appoint an agent to sell the property. However, the choice had been made not to undertake any action to dispose of the property in this manner. ● 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 did not occur for a significant number of years after the deceased passed away. | Detailed Reasoning - Conclusion:: After considering the facts of this situation, while we accept that there had been issues arising as a result of ‘D’ medical condition, 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 and your response to ‘D’ circumstances. Activities could have been undertaken to 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 in relation to ‘D’ medical issues, it was ultimately the decision of the beneficiaries when the title of the property had been transferred into your names, to allow ‘D’ 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 was sold was over nine 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 your ownership interest in the property.