Private ruling: CGT - deceased estate - main residence exemption - Commissioner's discretion
Date of advice: 18 March 2016
Published: May 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

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? | A1: No.

Relevant facts and circumstances: The deceased died in the 19XX-YY financial year. The property is still held in the name of the deceased. The property was purchased after 20 September 1985. The deceased occupied the property prior to their death, together with their child. The property was the main residence of the deceased prior to their death. At the time of the deceased's death, there was only one surviving immediate family member. The surviving family member occupied the property as their main residence, from the deceased's date of death up until their own death. During the lifetime of the deceased's child, they occupied the property rent free. The will consisted of a single page in which the deceased left everything to their child-in-law. As the terms of the will were simple, the deceased did not grant their child the right to occupy the dwelling. Shortly after the death of the deceased, the executor, who was also the child-in-law, engaged a firm of solicitors to apply for probate. The Probate Office at the time refused to grant probate of the will. The executor did not contest the point at the time. While there were ongoing discussions between the executor and the legal representatives, up until the death of the deceased's child, no other will of the deceased could be found. The executor made another application for grant of probate in the 20VV-WW financial year, and was still denied. The executor filed a number of affidavits with the courts. As a result the probate office granted probate in the 20ZZ-AA financial year. Although probate was not granted while the deceased's child was still alive, it was intention of the executor to permit the child of the deceased to reside in the property during their lifetime. Since probate was granted, the deceased's grandchild had occupied the residence for a short period of time, rent free. You contacted a tax agent, who made you aware that you needed to request Commissioner's discretion, in order to obtain the full main residence exemption. You contacted a real estate agent and the property is expected to be auctioned in the 20AA-BB financial year.

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

Reasons for decision: Summary: Subsection 118-195(1) of the ITAA 1997 states that if you own a dwelling in your capacity as trustee of a deceased estate (or it passed to you as a beneficiary of an estate), then you are exempt from tax on any capital gain made on the disposal of the property if: • the property was acquired by the deceased before 20 September 1985, or • the property was acquired by the deceased on or after 20 September 1985 and the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income, and • your ownership interest ends within 2 years of the deceased's death (the Commissioner has discretion to extend this period in certain circumstances). You have an ownership interest in a property if you have a legal interest in the property. This means that if you sell a property, your ownership interest continues until the date of settlement (rather than the date the contract of sale is signed). In this case, the property was purchased by the deceased after 20 September 1985 and was their main residence until they passed away in the 19XX-YY financial year. The property was not sold within 2 years of the deceased's date of death. You will only be able to disregard the capital gain from the sale of the property if the Commissioner extends the 2 year time period. The Commissioner can exercise his discretion in situations such as where: • 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 circumstances outside the beneficiary or trustee's control | Detailed Reasoning - Application to your circumstances: In your case while we understand that the will being challenged is reasonable grounds for the Commissioner to potentially exercise discretion, however when probate was finally granted, there was still a notable delay between probate and putting the property on the market. There was no reason for delay in putting the property on the market other than not being aware of the two year period. Unfortunately not being aware of legislation is not reasonable grounds for the Commissioner to exercise their discretion and extend the two year period. Additionally during the period between when probate was granted and when the property went on the market, a grandchild of the deceased lived in the property for a short period of time. Where someone lives in the property that is not expressly provided for in the will, the Commissioner would not usually exercise their discretion and extend the period. Furthermore although probate was not granted in the period while the child of the deceased was still alive, should probate have been granted in this period, it was noted that it was still the intention of the executor to permit the child of the deceased to reside in the property during her lifetime. Should this scenario have arisen, the executor of the estate would not have been entitled to the main residence exemption because the child of the deceased would not have had a right to occupy the dwelling under the will and would have lived in the property for greater than two years. Having considered the relevant circumstances, the Commissioner will not exercise his discretion and extend the 2 year time limit.