Private ruling: Deceased estate
Published: February 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: The scheme has commenced

Ruling: Q1: Does the main residence exemption apply from the date of the deceased's death until the end of the right to occupy the property? | A1: Yes. | Q2: 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 from the end of the right to occupy until the property is sold? | A2: Yes. | Q3: Does the exempt capital gain need to be included in the beneficiaries' income tax returns? | A3: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The deceased passed away during the 199X financial year, leaving his principal place of residence to the children. The deceased's child had the right to occupy the property until their death. The deceased's child passed away during the relevant financial year. The property was originally purchased by the deceased prior to 20 September 1985. The property was sold and settlement occurred during the relevant financial year. The property remained vacant between the date the deceased's child passed away and the date the property was sold.

Relevant legislative provisions: Income Tax Assessment Act 1997 118-130(3). | Income Tax Assessment Act 1997 section 118-195. | Income Tax Assessment Act 1997 subsection 118-195(1).

Reasons for decision: Summary: Any capital gain made on the dwelling is disregarded. Therefore it does not need to be included in the income tax returns of the beneficiaries. | Detailed Reasoning - Detailed reasoning: A capital gain or capital loss is disregarded under section 118-195 of the ITAA 1997 where a CGT event happens to a dwelling if it passed to you as an individual beneficiary of a deceased estate or you owned it as the trustee of the deceased estate. The availability of the exemption is dependent upon: • - who occupied the dwelling after the date of the deceased's death, or • - whether the dwelling was disposed of within two years of the date of the deceased's death. For a dwelling acquired by the deceased, you will be entitled to a full exemption if: • the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of the following relevant individuals: • the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased) • an individual who had a right to occupy the dwelling under the deceased's will, or • an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary, or • your ownership interest ends within two years of the deceased's death. In this case, when the deceased died, they granted their child the right to occupy the property until the child's death. The child lived in the property until they passed away during the relevant financial year. A contract to sell the property was signed and settlement occurred during the relevant financial year. Therefore, you are entitled to an exemption under section 118-195 of the ITAA 1997 for the period from when the deceased passed away until the deceased's child passed away. Subsection 118-130(3) of the ITAA 1997 provides that where the sale or other disposal of the dwelling proceeds under a contract, the ownership interest ends at the time of settlement of the contract of sale and not at the time of entering the contract. In this case, the property sale settled more than two years after the deceased's death. As the property was used by their child who had a right to occupy the dwelling under the deceased's will until their death, you are entitled to an exemption until that time. Therefore, the period between the child's death and the date the sale settled needs to be examined. Subsection 118-195(1) of the ITAA 1997 confers on the Commissioner discretion to extend the two year exemption period, thus this alternative basis of exemption in the provision may apply. The following is a 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 (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 reasons outside the beneficiary or trustee's control. The delay in disposing of the property after the deceased passed away was due to their child having the right to occupy the dwelling. The deceased passed away during the 199X financial year and their child passed away during the relevant financial year. A contract to sell the property was signed and it settled during the relevant financial year. Therefore, in order for the dwelling to be fully exempt from capital gains tax, the Commissioner will need to apply his discretion from the date of the child's death until the contract settlement date. In determining whether or not 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. Having considered the relevant facts, the Commissioner is able to apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit. | Detailed Reasoning - Income tax return: As a beneficiary of a deceased estate, you are assessable on a share of any capital gain that you are presently entitled to. In your case, any capital gain on the sale of the deceased's main residence is fully exempt from income tax. Therefore you do not need to include any net capital gain in your income tax return.