Private ruling: Capital gains tax - deceased estates - main residence
Date of advice: 3 August 2020
Published: September 2020
Ruling period: Year ending 30 June 2019
Date scheme commenced: 1 July 2017

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 XX/XX/2018? | A1: Yes

Relevant facts and circumstances: The Deceased died in 20XX. Before their death, they resided at XXXX (The Property). You were bequeathed The Property in their Will. The Property was the deceased main residence. The Property was rented out prior to their death, with the money being deposited into their account. During sometime, they lived primarily with you. They also had several short stints in a nursing home for respite. Following their death, The Property continued to be rented out until 20XX. You and the other trustee were named as the Executors of their Will. You and the other trustee obtained a Grant of Probate of the Will in 20XX. Upon The Deceased's death, the other trustee took control of The Property. The other trustee then wanted information regarding financial transactions that had occurred in the years prior to The Deceased's death when The Property was rented out. This involved repeated requests for information and Affidavits prepared by your solicitors as there was disputation with other beneficiaries of The Estate. Attempts were made to mediate & settle the dispute to no avail. Several years later, the other trustee commenced court action, alleging undue influence over the Deceased, unconscionable conduct and breach of fiduciary duties by yourself and your spouse. The other trustee sought equitable compensation and an account of all purported profits and benefits alleged to have been obtained by yourself and your spouse. This process went on until the matter was settled out of court years later as per the Deed of Settlement. You then took control of The Property. The Property was rented out by the Estate of the Deceased between the death of the Deceased and the time of the settlement of the Estate. The Property was tenanted from XXXX for approximately XX weeks with a formal lease in place. During this time you were experiencing financial difficulties with your business. Your spouse also required assistance with managing their chronic mental health condition. The Property was listed for sale on XXXX. Settlement occurred a short time later.

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

Reasons for decision: Summary: When you inherit a dwelling as a beneficiary of a deceased estate, you can disregard any capital gain on the sale of that dwelling, providing you sell the dwelling within two years of the death of the deceased and certain other conditions are met. Generally, the Commissioner will allow a longer period where the dwelling could not be sold and settled within two years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first two years. As above, in certain circumstances, the Commissioner may grant an extension to the two-year period for disposing of a dwelling without having a capital gain. The circumstances where an extension may be granted include but are not limited to: · the ownership of the dwelling, or the will, is challenged · a life or other equitable interest given in the will delays the disposal of the dwelling · the complexity of the deceased estate delays the completion of administration of the estate, or · settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of your control In determining whether to grant an extension the Commissioner is also expected to consider whether and to what extent the dwelling is used to produce assessable income and how long the trustee or beneficiary held it. Following the Deceased's death, The Will was challenged. This challenge to The Will commenced in 20XX, when the joint executor took you to court. Prior to this, between 20XX and 20XX there were protracted and ongoing negotiations taking place in attempt to resolve issues around The Will. These negotiations involved the joint executor and other beneficiaries. The joint executor had control of the property from the time of the Deceased's death and you were unable to list The Property for sale. In 20XX, XXXX, the joint executor, took you to court for breach of fiduciary duties and unconscionable conduct. A notice of discontinuance was signed in 20XX and a Deed of Settlement was completed. You were unable to sell the property until the Deed of Settlement was completed. Once the impediment to sale had been resolved, you listed the dwelling approximately Xmonthslater. Settlement occurred some months later. The delay between the deed of settlemen t coming into existence and the listing of The Property was in part due to financial issues with your business and health issues within your immediate family. As outlined in Practical Compliance Guidelines 2019/5 The Commissioner's discretion to extend the two-year period to dispose of dwellings acquired from a deceased estate, a long delay won't prevent an extension of the 2-year period being allowed, if the necessary circumstances preventing the disposal of The Property exist. One of the factors that needs to be considered when granting the discretion includes the use of the Property to produce assessable income. In this situation, The Property was rented for an extended period prior to being listed for sale. However, during the majority of this time, you were unable to list The Property for sale. Once you were able to list the property for sale, there was a delay due to family health issues and financial difficulties with your business. On balance, the factors in favour of granting the discretion outweigh those against awarding the discretion. Therefore, having considered the relevant facts and circumstances, the Commissioner will apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two-year time limit until the settlement date of the property.