Private ruling: Capital Gains Tax
Date of advice: 16 April 2018
Published: July 2018
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: The scheme has commenced.

Ruling: Q1: Will the Commissioner allow a period longer than 2 years within which the ownership interest of the trustees of the estate of the late X in a dwelling may end so that the trustees may disregard any capital gain in terms of section 118-195 of the Income Tax Assessment Act 1997 ? | A1: Yes.

Relevant facts and circumstances: Real Estate overseas and in Australia Territory Property Before 1985 Y, the spouse of X, acquired a property in an overseas territory. After 1985 X and Y migrated to Australia. Thereafter, the territory property was occupied by their children. No income has ever been received from the territory property. Y died in 2011 and X inherited the territory property. Australian Property In Australia a dwelling was acquired by X and Y after 1985. The dwelling became the main residence of X and Y. The dwelling was registered in the names of X and Y, as joint tenants. Y died in 20XX and X inherited the interest owned by Y in the dwelling. X continued to reside in the dwelling as a main residence until X died in 20XX. Real estate in the will of X A copy of the will made by X has been provided. P and Q are children of X and are the co-trustees of the estate of the late X. The deceased’s will provided that the territory property be given to R and S who are children of the deceased and that the residuary estate be applied for the benefit of T, a child of X, during the lifetime of T. Upon the death of T the balance of the residuary estate that is then in existence is to be distributed equally among the other children of X (the remaindermen). The codicil to the will provided that P and Q, children of the deceased, each receive $X thus reducing the sum available to be applied to the benefit of T and ultimately distributed to the remaindermen. Delay in the grant of probate of the will of X X made a will and later made a codicil. The codicil bequeathed $X each to P and Q. X died in 20XX and the summons for probate of the will was filed. In 20XX a decision and orders were made regarding probate of the will. Extracts from the judgement have been provided. Probate of the will was granted in 20XX which was more than 3 years after both the summons for probate was lodged and the death of X. The deceased’s main residence was disposed of by sale in a contract dated 20XX which was more than 4 years after the death of X and more than 1 year after the grant of probate of the deceased’s will. A detailed time line of actions and events leading to the grant of probate was provided. Australian Dwelling – Rented after the death of X The dwelling was vacant from the date of death of X in 20XX until 20XX when a tenant occupied the property. A lease of the dwelling was entered into in 20XX and extended in 20XX. At the expiry of the lease in 20XX the tenant was advised to find other accommodation. However, the tenant was allowed to continue to occupy the dwelling for a further few months. The sale contract for the dwelling is dated 20XX. A gross capital gain was realised from the sale of the dwelling. The sale of the dwelling in 20XX took place more than 4 years after the death of X and more than 1 year after the grant of probate of the deceased’s will.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-5 | Section 104-5 | Section 104-215 | Section 108-5 | Subsection 110-25(4) | Sections 115-15 and 115-100 | Section 115-30 | Section 118-115 | Section 118-195 | Section 118-197 | Section 128-10 | Subsection 995-1(1)

Reasons for decision: Summary: The trustees seek an extension beyond the statutory period of 2 years in which to make a disposal of the deceased’s main residence where any capital gain may be disregarded in terms of section 118-195. This request is made on the basis that the circumstances which caused the delay in the disposal of the dwelling were beyond the control of the trustees. The Commissioner has granted the extension as requested. | Detailed Reasoning - Detailed reasoning: The trustees ask that in terms of item 1 of the table in subsection 118-195(1) the Commissioner allow a longer period than the 2 years prescribed in that provision within which the disposal of the main residence of the deceased could take place such that the trustees could disregard any capital gain arising from the sale of the dwelling. The trustees submit that the circumstances which delayed the sale of the main residence of the deceased were beyond their control. It is therefore necessary to examine those circumstances and supporting arguments presented by the trustees and to determine whether the Commissioner should allow a longer period to dispose of the main residence of the deceased. The relevant law and its application together with the arguments put by the trustees in support of their request are examined below. First it is necessary to verify that in terms of paragraph 118-115(1)(a) the dwelling qualifies as the main residence of the deceased just before the deceased’s death. The deceased and the spouse of the deceased acquired the dwelling as joint tenants after 1985. The dwelling was their main residence from the date of acquisition. The spouse of the deceased died in 20XX and the deceased inherited the half interest in the dwelling that the spouse had owned. The dwelling was the main residence of the deceased after the death of the spouse up to the date of death of the deceased. The dwelling was not used for the purpose of producing assessable income during the lifetime of the deceased. Therefore with respect to item 1 of the table in subsection 118-195(1) the conditions in column 2 are met. In order for the condition in column 3 in item 1 of the table in subsection 118-195(1) to be met it will be necessary for the Commissioner to grant a longer period than the 2 years specified in that provision in which to make a disposal of the deceased’s main residence. That is the issue at the heart of this ruling application. As stated above the trustees seek the grant of an extension on the basis that there were matters beyond the trustees’ control which prevented the disposal of the main residence taking place within the prescribed period of 2 years. Those matters included that the Court was required to consider admitting to probate a codicil to the will in a situation, amongst other things, where one of the witnesses to the codicil was a beneficiary under the codicil. This codicil in the form it took was a novel matter that needed to be referred to the Probate List judge for consideration and judgement. There was also the Court and Probate Rules requirement that all beneficiaries under the will be notified of the codicil and its affect upon their entitlements under the will. A great deal of time was taken to carry out this task and to file with the Court the necessary affidavits and other documents that reported upon the results of the trustees’ efforts. Accordingly, it will be necessary to examine and consider all the causes for the period of over 4 years that elapsed between the date of death of the deceased and the disposal of the deceased’s main residence. This period can be split into two parts, the first part concerns the time taken for the grant of probate of the will while the second part relates to the time taken to sell the dwelling after probate was granted. The examination will begin with the grant of probate. A detailed timeline of events and actions leading to the grant of probate has been provided by the trustees. It starts in 20XX when the summons for probate was filed and continues for over 3 years to 20XX when probate was granted. Relevantly it contains a description of the actions taken by the trustees and by others on behalf of the trustees in order to meet the Court’s requirements for the grant of probate. In the course of the process of the grant of probate the Court issued a number of requisitions. The requisitions amongst other things required the trustees to demonstrate compliance with a number of Probate rules of the Court and to provide affidavits of the lawyer representing the trustees, affidavits of the witnesses to the codicil; serve a Notice of Proceedings upon persons affected by the proceedings who had not consented to the proceedings, and file affidavits about the service of such Notice. The requirement concerning the service of a Notice of Proceedings upon persons affected by the proceedings arose because the codicil to the will affected the entitlements of all the beneficiaries. They were the primary beneficiary of the estate plus siblings of the primary beneficiary who are remaindermen of the residuary estate under the will. Accordingly, the Court required the trustees to notify all of the affected parties to the will of its terms and obtain their acknowledgement of or consent to the change made by the codicil before probate of the will could be granted. This involved the attempts to serve the Notice of Proceedings upon each person and to obtain their signature on a proof of service delivery document. The primary beneficiary was a resident of Country C while the relevant siblings of the primary beneficiary were residents of Country A, Territory B and Country C. The trustees’ account of the difficulties that were met and that they needed to overcome in the attempts to make contact with and to deliver the Notice of Proceedings to each affected person as well as to obtain the relevant acknowledgement of receipt is supported by and documented in copies of affidavits provided. In the judgement and orders made regarding probate of the will the Court acknowledged those difficulties. However, those difficulties were not the only cause of the delay in complying with the Court’s requisition and the consequent delay in the processing of the application for probate. Another cause for the delay in the grant of probate involved the lawyer acting for the trustees whose business underwent a restructure and relocation. Those events affected the time taken to file the affidavits made by the respective family members regarding the outcome of their attempts to serve the Notice of Proceedings upon the relevant affected persons. The judgement with respect to the codicil was given in 2015 and a number of days later probate was granted. The trustees were then in a position where they could administer the estate. Yet the contract for the sale of the deceased’s main residence is dated more than 1 year after the grant of probate of the deceased’s will. This was because when probate was granted the dwelling was occupied by a tenant who held a lease that had been entered into in 20XX . The lease had several months to run and thus the dwelling could not be sold immediately. At the expiry of the lease the tenant was advised to find other accommodation as the trustees wished to sell the dwelling. However, the tenant was allowed to occupy the dwelling for a few months more before vacating. The dwelling was then sold. | Detailed Reasoning - Income producing use of a main residence of the deceased: The income producing use of a main residence of the deceased in the period after the death of the deceased is considered in Taxation Determination TD 1999/70 (TD 1999/70) as to whether any capital gain or loss on disposal is able to be disregarded. The facts in TD 1999/70 were that the disposal was made by a beneficiary to whom the dwelling was bequeathed and the disposal took place within the statutory period of 2 years after the death of the deceased. The decision in TD 1999/70 was that the beneficiary was able to disregard any capital gain or capital loss arising from the disposal of the deceased’s main residence even though the dwelling had been income producing after the death of the deceased. | Detailed Reasoning - Conclusion: As discussed in detail above there are two parts to the period under examination in this case. The first part concerns the grant of probate of the will and the second part relates to the income producing use of the dwelling after the death of the deceased and the disposal of the dwelling. With respect to the first part it is considered that the time taken for the grant of probate of the will is due collectively to the complexity of the matters that needed to be resolved, the nature of the obstacles that arose before the trustees in the course of the process, as well as the complicated interactions amongst some of the parties to the process. Further, it is considered that where any of these circumstances caused a delay it was beyond the control of the trustees. Turning to the second part regarding the disposal of the dwelling the trustees had more influence over the process here. However, the trustees were constrained by the rights of a tenant to occupy the dwelling under a lease. This was in the situation when probate of the will was granted the tenant had a few months to run on a lease. At the expiry of the lease the tenant was advised to find other accommodation. However, due to the ill health of the tenant at the time, the tenant was allowed to continue to occupy the dwelling for a further few months. Consequently, directly as a result of the trustees’ decision to allow the tenant to remain in the dwelling after the expiration of the lease the disposal of the dwelling was delayed for a few months. This delay was clearly a circumstance within the control of the trustees. However, in the context of this case in its entirety this period of a few months is not significant and on balance the circumstances which caused the disposal of the dwelling to take place outside the statutory period of 2 years from the date of death of the deceased, apart from this instance, were circumstances beyond the control of the trustees. Lastly, it is necessary to consider the income producing use of the main residence of the deceased in the period after the death of the deceased as to whether any capital gain or loss on disposal is able to be disregarded. The decision in TD 1999/70 which allowed any capital gain or loss to be disregarded was limited to the situation where the disposal of the main residence of the deceased took place within 2 years of the date of death of the deceased and the disposal was made by a beneficiary who inherited the property. The facts in this case are different from those in TD 1999/70 on two main points. First the disposal of the dwelling did not take place within 2 years of the death of the deceased; and secondly the disposal is being made by the trustees of the estate of the deceased not a beneficiary. Nevertheless, it is considered that the principle in TD 1999/70 should apply in a situation where there has been an income producing use of the main residence of the deceased in the period after the death of the deceased. This will allow any capital gain or loss on disposal to be disregarded where the Commissioner grants an extended period beyond 2 years after the death of the deceased within which to make a disposal. Further the principle should apply where the disposal is made by the trustee of the estate of the deceased. Therefore the Commissioner will allow a period longer than 2 years within which the ownership interest of the trustees of the estate of the late X in a dwelling may end so that the trustees may disregard any capital gain in terms of section 118-195 of the ITAA 1997.

Question 1: All legislative references are to provisions of the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.