Private ruling: Capital Gains Tax - deceased estate 2 year rule
Published: September 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the Commissioner exercise his discretion under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) and extend the two year time period? | A1: Yes

Relevant facts and circumstances: The deceased died on XX July 20XX. The deceased acquired the property before 20 September 1985. The property was the deceased's main residence from acquisition until her death. The property has never been used to gain or produce assessable income. The deceased's will named two Executors, M and S. M lives overseas. S has resided in the property since DDMMYYYY and continued to live in the property after the deceased's death. Probate application was lodged on DDMMYYYY and Probate was granted on DDMMYYYY. M commenced legal proceedings on DDMMYYYY, seeking orders for the appointment of Trustees for sale. On DDMMYYYY, the Court ordered mediation. The mediation occurred on DDMMYYYY. An agreement in principal regarding the sale of the property was reached through mediation. The property was sold at auction to an unrelated third party on DDMMYYYY. Settlement is due to occur on DDMMYYYY. The delay in lodging probate and the disposal of the property is due to complexities in administration including one of the executors living overseas and a dispute arising between the executors in relation to the disposal of the property.

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

Reasons for decision: Summary: Subsection 118-195(1) of the ITAA 1997 states that if you own a dwelling in your capacity as trustee of a deceased estate (or it passed to you as a beneficiary of an estate), then you are exempt from tax on any capital gain made on the disposal of the property if: ● the property was acquired by the deceased before 20 September 1985, or ● the property was acquired by the deceased 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, and ● your ownership interest ends within 2 years of the deceased's death (the Commissioner has discretion to extend this period in certain circumstances). You have an ownership interest in a property if you have a legal interest in the property. This means that if you sell a property, your ownership interest continues until the date of settlement (rather than the date the contract of sale is signed). In this case, the property was purchased by the deceased before 20 September 1985 and was their main residence until they passed away on DDMMYYYY. The property was not sold within 2 years of the deceased's date of death. You will only be able to disregard the capital gain from the sale of the property if the Commissioner extends the 2 year time period. The Commissioner can exercise his discretion in situations such as where: ● 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 (for example, 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 circumstances outside the beneficiary or trustee's control Having considered the circumstances and the factors outlined above, the Commissioner is able to apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension of time.