Private ruling: Capital gains tax – deceased estate – Commissioner’s discretion to extend the two year period – inherited dwelling
Date of advice: 17 January 2018
Published: May 2018
Ruling period: Year ended 30 June 2018.
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? | A1: Yes

Relevant facts and circumstances: The Deceased purchased the dwelling after 19 September 1985 (the Dwelling). The Deceased passed after a number of years. The Dwelling was the Deceased’s main residence at the time of their death. The Dwelling was not used for income producing activities and no income has been received from the Dwelling after the passing of the Deceased. The Deceased’s Will named the following as executors (the Executors): ● the Deceased’s partner (the Partner): and ● a mutual friend (Executor 1) of both the Deceased and the Partner. The Deceased and the Partner had been in a de facto relationship for a number of years prior to the passing of the Deceased. The Deceased’s Will named the following as beneficiaries: ● the Partner; ● Child A; ● Child B; ● the Deceased’s grandchildren; and ● a friend of the Deceased. Shortly after the Deceased passed away Executor 1 was contacted by Child A’s solicitors questioning the validity of the Deceased’s Will, citing mental capacity concerns. Child A’s solicitors lodged a caveat preventing the Court from granting the Executors probate over the Deceased Will. After a number of months the Executors and their legal representatives met with Child A and Child B and their legal solicitors. Child A and Child B advised the Executors that they believed the Will was not valid and that the Deceased’s estate should be divided as if the Deceased had not left a Will. After a number of months the Executors received notification the Partner intended to make a Family Provision Application (FPA). The Executors applied for Probate. After a period of time the Supreme Court issued a Grant of Probate to the Executors. Shortly after Probate was granted the Partner lodged the FPA with the courts. The parties followed the Directions Order filed with the Partners FPA and attended mediation a number of months after probate was granted, when the matter of the Will was resolved. Advice on the value of the Dwelling was obtained from a number of real estate agents who had valued the Dwelling at between $XXX,XXX and $XXX,XXX. The Dwelling was put on the market for $XXX,XXX a short period after the mediation session had occurred. After a short period of time a verbal offer was received on the Dwelling for less than the estimated value which was rejected by the Executors. Shortly after the verbal offer Partner offered to purchases the Dwelling for the same amount as the verbal offer, which was rejected by Child A and therefore rejected by the Executors. During that same month a written offer was received from a third party subject to finance, which was accepted. However, the purchase did not proceed as the purchaser was unable to obtain finance. A contract for the sale of the Dwelling was entered into a short period after the two year anniversary of the date the Deceased’s passed away with settlement occurring a number of months later.

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: The Commissioner will exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to dispose of the Dwelling. | Detailed Reasoning - Detailed reasoning: The capital gains provisions allow for concessional treatment to be given to a dwelling that was owned by a deceased person if the executors of the deceased person’s estate sell that dwelling within two years of the date of death. Any capital gain or capital loss made on the sale of such a dwelling is disregarded if the dwelling was: ● Acquired by the deceased before 20 September 1985, or ● The deceased’s main residence when they died. The Commissioner has the discretion to extend the two year period. This extension is generally only granted where the executors are merely arranging the ordinary sale of the dwelling and the cause of the delay is beyond their control (for example, if the will is challenged). There must not be any other mitigating factors against exercising it. In your case, the delay in disposing of the Dwelling was due to the concerns that the Deceased’s Will was not valid which resulted in a caveat being put on the Dwelling and mediation being undertaken to resolve the issue. Additionally, a potential sale of the Dwelling had not occurred due to the potential purchaser’s failure to be able to obtain finance to the Dwelling. These delays prevented you from disposing of the Dwelling within the two year time limit. The Commissioner accepts that it is appropriate to grant the short extension that you have requested.