Question

Explain in your own words the tax policy reason behind section 118-195 Income tax Assessment Act 1997 with respect to deceased estates. In so doing discuss why the commissioner has been given the discretion to extend the two year period . Your answer must be supported by reference to legislation case law and tax rulings if any... note: Australian taxation law

Answer 1

Here Subsection 118-195(1) of the ITAA 1997 (all references in this Part are to this Act) provides us the capital gains tax (CGT) exemption for beneficiary or trustee of deceased estate where the CGT event happens the dwelling (or an ownership interest in a dwelling) acquired from a deceased estate. An exemption shall be provided where the following conditions will be satisfied:

• The beneficiary or trustee’s ownership interest in dwelling ends within two years of the deceased’s death.
• Just before the deceased’s death, for the post‑CGT dwellings:
  • the dwelling was their main residence and
  • it was not then being used to produce an assessable income.

Where a trustee or beneficiary of a deceased estate cannot access a CGT exemption under section 118‑195, section 118‑200 may provide partial exemption.

In particular, subsection 118‑200(3) ensures that for post‑CGT dwellings, where the trustee or beneficiary’s ownership interest ends within two years of the deceased’s death, the period between the deceased’s death and when their ownership interest ends can be ignored when calculating a capital gain or capital loss.

The amendments give the Commissioner of Taxation (the Commissioner) discretion to extend the time period in subsections 118-195(1) and 118‑200(3) where the trustee or beneficiary of a deceased estate’s ownership interest ends after two years from the deceased’s death.

The Commissioner will be expected to exercise discretion in situations such as where:

• the ownership of a dwelling or a will will be 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.
• settlement of contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside to the beneficiary or trustee’s control.

These examples are not exhaustive.

In exercising this discretion, the Commissioner is expected to consider whether and to what extent the dwelling is used to produce assessable income and the period that the trustee or beneficiary held the ownership interest in the dwelling.

The amendments shall apply in relation to the CGT events that happen in the 2008-09 income year and later income years. The amendments are beneficial to taxpayers.

The operation of section 170 of the Income Tax Assessment Act 1936 is modified so that taxpayers are able to seek an amended assessment to take advantage of these amendments where their original assessment was made before the commencement of these amendments but their period for seeking an amendment to their tax return has been expired. Broadly, taxpayers will be able to seek an amended assessment in these circumstances within two years of that commencement