Private ruling: CGT - deceased estates - (2 year discretion)
Published: January 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the Commissioner exercise his discretion to extend the 2 year period to the property settlement date for the exemption from CGT for main residence acquired from a deceased person? | A1: No. | Q2: Will any capital gain made on the disposal of the property be assessed in the deceased estate? | A2: Yes.

Relevant facts and circumstances: The Deceased passed away in 19XX. The Deceased did not leave a will and died with one asset being his/her former main residence. The property was purchased on trust, in 19YY, with the Deceased being the sole beneficiary of the trust. The Deceased met all the costs of the property. The property has not earned any income between the original purchase and its ultimate sale. The Deceased resided in the property from purchase up until just before his/her death when he/she required care and took up residence at a nursing home. Members from the Deceased's first family were not aware of the property, and as the Deceased had no other assets, believed the affairs of the deceased were finalised. Members from the Deceased's second family were unaware of the tax consequences and continued to occupy the property subsequent to the Deceased's death. A member from the Deceased's second family attempted to sell the property. It was revealed that the property could not be sold as no one was authorised to do so. A lawyer was engaged and administrators were appointed for the Estate in 20ZZ. The property was sold in 20AA.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 118-195(1).

Reasons for decision: Summary: As per subsection 118-195(1) of the ITAA 1997, a capital gain or capital loss you make from a capital gains tax (CGT) event that happens in relation to a dwelling or your ownership interest in it is disregarded if: (a) you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and (b) at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied. | Detailed Reasoning - And also one of these items: 1 the deceased *acquired the *ownership interest 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 your *ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner 2 the deceased *acquired the *ownership interest before 20 September 1985 the *dwelling was, from the deceased's death until your *ownership interest ends, the main residence of one or more of: (a) the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or (b) an individual who had a right to occupy the dwelling under the deceased's will; or (c) if the *CGT event was brought about by the individual to whom the *ownership interest *passed as a beneficiary - that individual In this case, the asset was held on trust, with the deceased being the sole beneficiary. As per section 118-130(1) of the ITAA 1997 as the Deceased had an equitable interest in the dwelling, the Deceased also had an ownership interest in the dwelling for the purposes of subsection 118-195(1) of the ITAA 1997. The Commissioner has discretion to extend the two-year time period in relation to CGT events that happened in the 2008/09 income year and later income years. 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, includes the following non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion: · the ownership of a dwelling 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 (e.g. the taxpayer or a family member has a severe illness or injury), or · settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for reasons outside the beneficiary or trustee's control. In this case, the Deceased died intestate and members from the Deceased's second family continued to live in the property for some time. It was only when a member from the second family tried to sell the property that it was realised that the estate had not been finalised. It was at this point, that members from the Deceased's first marriage became aware of the property; administrators were appointed and soon after the property was sold. Accordingly, you do not meet any of the criteria above and the Commissioner is unable to exercise the discretion. Therefore, you will be unable to disregard the capital gain made on the property under section 118-195 of the ITAA 1997. | Detailed Reasoning - Question 2: In order for a beneficiary to be assessed on the capital gain or loss made after such an event, they must have absolute entitlement to the CGT asset. TR2004/D25 states the core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. In your case, as none of the beneficiaries are absolutely entitled to the property, any capital gain made on the disposal of the property will be assessed in the deceased estate.