Private ruling: Capital gains tax - deceased estate - Commissioner's discretion to extend the two year period - main residence exemption
Published: May 2014
Ruling period: Year ended 30 June 2014.
Date scheme commenced: 1 July 2013.

Ruling: Q1: Will the Commissioner exercise 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? Answer Yes.

Relevant facts and circumstances: You are the trustees of the estate of a deceased person. You seek an extension of the two-year CGT exemption period as their main residence was sold several months after their death and just less than X years after probate was issued. The main residence was situated on a several hectare rural property that was never used for income-generation by the deceased. As is outlined below, you made every effort to sell the main residence of the deceased within 2 years of their death but a range of factors, including the status of the particular property market, resulted in unanticipated delay. During this time: • Probate was sought, but took longer than expected to be granted due to: • time taken to develop an inventory of goods and chattels as neither of you lived close to where the property was situated; and • complications in the process of applying for probate due to certain technical issues with the application. • The original documents were both lost in transit when they were sent to one of the trustees for witnessing purposes. Copies of the Probate were then sought. • Offers were received on the property, two conditional and one unconditional The first offer, conditional on the sale of a another property, was extended over a period and then fell through. The second conditional offer was extended for X months and then not pursued, due to an unconditional offer being made. The period from the acceptance of the final unconditional offer to settlement was less than X months. • The sale process was made more complex by both of you living some distance away, (one overseas), from where the property was situated. This resulted in delays in communication and signing of documentation which impacted on slowing down the process of reaching and formalising arrangements surrounding the offers. These delays also resulted in the loss of a potential offer. • One trustee relocated from one city to another during this period, causing additional disruption. Work pressures and living interstate made it difficult to travel to the property regularly to undertake maintenance and repairs resulting in period when the property did not present at its best. A number of trips were made by the trustee to the property to spend time on maintenance. You spent approximately $XXXX over the period on repairs, maintenance and utility costs. • Over the period between the decease's death and settlement on a date, the property was neither income producing nor used as a main residence of any beneficiary of the will.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 118-130(3) | Income Tax Assessment Act 1997 section 118-195 | Income Tax Assessment Act 1997 subsection 118-195(1)

Reasons for decision: Summary: A capital gain or capital loss is disregarded under section 118-195 of the ITAA 1997 where a capital gains tax 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 your case, when the deceased died the dwelling was the deceased's main residence prior to death, and at that time, was not being used to produce assessable income. However, the dwelling was not occupied by a relevant individual after the deceased's death and therefore this basis of exemption is not available. 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. The dwelling sale settled more than two years after the deceased's death, therefore, the alternative basis of exemption is also not satisfied. However, 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 was caused by unexpected delays in the settlement of the property (that is, a number of sale contracts fell through) for reasons outside the beneficiary or trustee's control and these delays prevented you from disposing of the property within the two year time limit. 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. The dwelling was not used by the deceased or the trustees to produce assessable income. 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.