Private ruling: Capital gains tax - deceased estate - Commissioner's discretion
Published: August 2014
Ruling period: Year ended 30 June 2015.
Date scheme commenced: 1 July 2014.

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? | A1: Yes.

Relevant facts and circumstances: The Deceased left a final will. Following the deceased's death, someone, filed an Application in a Court for Further Provision. As a result of the Application, the Assets of the Estate were not disturbed by Distribution pending the finalisation of the Application filed in the Court. Orders, by consent were filed resolving the Application. It took some time to give effect to the Order and the final transfer pursuant to the Order was achieved. The last will of the deceased bequeathed a dwelling to several people. Given the Application filed by someone, the transfer of this dwelling did not occur. Now that the Application is resolved the Estate is in a position to be finalised and distributed. The inheritors decided that they would prefer to sell the dwelling (given that they reside elsewhere) and the dwelling was transmitted to the Executor with a view to sell the dwelling once the Order had been given effect. The dwelling was listed with real estate agents. Consequently, a buyer was found and a contract was entered into. The contract is subject to satisfactory finance, and building and pest. The dwelling was used by the deceased as a family/holiday residence, and was lived in by the deceased prior to their death. The dwelling was never used as a source of income for the decease. Since the death of the deceased, it has been vacant and not been used to generate an income for the Estate. Given the time lapse from the death of the deceased, and given the complexity of the Estate and the Application filed in the Court, the entire Estate assets were called into question and until the Application was resolved, the Estate was held in abeyance. We are now seeking an extension of the two (2) year period and the waiver of any CGT being imposed for the dwelling. You have requested an extension of time until a date to finalise the sale of the dwelling. Settlement has taken place.

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 Explanatory memorandum to the Taxation Laws Amendment Bill (No.9) of 2011 (Cth)

Reasons for decision: Summary: A capital gain or capital loss may be 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 and a beneficiary of a deceased estate or you owned it as the trustee of the deceased estate. For a dwelling acquired by the deceased prior to 20 September 1985, 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 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 the CGT event was brought about by that person, or • your ownership interest ends within two years of the deceased's death. In your case, when the deceased died, an interest in the dwelling passed to you. 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. 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. In your case, the delay in disposing of the dwelling was due to the will of the deceased being challenged. This delay prevented you from disposing of the dwelling 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. Having considered the relevant facts, 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 a date.