Private ruling: Commissioner's discretion - deceased estate
Date of advice: 8 September 2022
Published: November 2022
Ruling period: x XX 20XX to y YY 20YY
Date scheme commenced: x XX 20XX

Ruling: Q1: Will the Commissioner exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 ('ITAA 1997') to allow an extension to the 2-year limit to xx XX 20YY for the Capital Gains Tax ('CGT') exemption on the sale of the inherited dwelling that was the main residence of the deceased? | A1: Yes

Relevant facts and circumstances: Background information 1. The deceased purchased the property located at XYZ ('the Property') in XX 19XX for $xyz. 2. The Property was the deceased's main residence until the time of his death on x XX 20XX. 3. The Property was never used for the purpose of producing assessable income. 4. Following his death, the deceased's Will was contested by three parties based on his testamentary capacity to make his last will. Each of the wills which the various parties propounded had different executors. 5. Probate could not be applied for until a decision of the Supreme Court was made as to the validity of a last will. 6. A prolonged hearing was held in the Supreme Court XYZ in xx and yy 20XX to determine which will was the final will of the deceased. Further written submissions were made to the Court up until xx 20YY. 7. His Honour, Justice XY handed down a lengthy judgement on xx YY 20YY. Justice XY ordered that the will dated y YY 20YY ('the Will') be admitted to Probate in solemn form (Order 1). 8. Justice XY further ordered that the three individuals, the Executors and Trustees named in the Will (the 'Executors) consent to an order of Probate of the Will and confirm that they are ready, willing and able to perform the duties of the office of a legal personal representative of the deceased according to law (Order 2). 9. Justice XY further ordered that the Probate of the Will be granted to the Executors (Order 3). 10. Order 4 of Justice XY's Orders directed that the proceedings be referred to the Probate Registrar to enable the application for Probate in solemn form to be made by the executors of the last Will as set out in order 2. 11. There was a delay in the paperwork being transferred to the Probate Registry, however Probate in solemn form was granted on x YY 20YY. 12. It was not possible prior to the orders of the Supreme Court and the grant of Probate for a sale of any assets owned by the Estate. 13. The period of time between the date of death (x XX 20XX) and the granting of Probate (x YY 20YY) represents a period of x years of litigation as the final Will was contested by three contesting parties on issues related to the deceased's capacity to make his last Will. 14. Once litigation was finalised in xx 20YY and Probate in solemn form granted by the Supreme Court Probate Registry on x YY 20YY, the Executors listed the property for sale for a number of weeks. The property was sold in YY 20YY. 15. Settlement of the Property occurred on xx XX 20YY. 16. Three individuals are the administrators and beneficiaries of the estate, the assets of which primarily comprise of seven properties, including the Property, and certain other assets, namely shares in private and publicly listed companies held by the Estate: 17. The new owners of the Property, as at the date of settlement, are not related to the deceased. Information provided 18. You have provided a number of documents containing detailed information in relation to the applicant's private ruling application, including: • Private Binding Ruling ('PBR') Application, dated x YY 20YY • Response to further questions provided 19. We have referred to the relevant information within these documents in applying the relevant tests to your circumstances. Assumption(s) Not applicable.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 118-130(3) | Income Tax Assessment Act 1997 Section 118-195 Further issues for you to consider | Not applicable.

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated. The Commissioner will exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 to allow an extension to the 2-year limit for the Capital Gains Tax ('CGT') exemption on the sale of the inherited dwelling that was the main residence of the deceased. | Detailed Reasoning - DETAILED REASONING: 20. Subsection 118-195(1) of the ITAA 1997 outlines the following with regard to a dwelling acquired from a deceased estate: (1) A capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if: (a) you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and (b) at least one of the items in column 2 and at least one of the items in column 3 of the table below are satisfied; and (c) the deceased was not an excluded foreign resident just before the deceased's death. | Detailed Reasoning - And also one of these items: 1 the deceased acquired the ownership interest 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 your ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner 2 the deceased acquired the ownership interest before 20 September 1985 the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of: (a) the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or (b) an individual who had a right to occupy the dwelling under the deceased's will; or (c) if the CGT event was brought about by the individual to whom the ownership interest* passed as a beneficiary-that individual 21. Subsection 118-130(1) of the ITAA 1997 defines ownership interest in a dwelling as having a legal interest of the dwelling until it ends on settlement of the property. 22. 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, as follows: (3) For land or a dwelling where you have a contract for the happening of the *CGT event, you have an ownership interest in it until your legal ownership of it ends. 23. Paragraph 1 of Practical Compliance Guideline PCG 2019/5 - " The Commissioner's discretion to extend the two year period to dispose of dwellings acquired from a deceased estate ", states that section 118-195 ITAA 1997 disregards capital gains and capital losses made from certain CGT events that happen in relation to a dwelling that was a deceased person's main residence and not being used to produce assessable income just before they died, or was acquired by the deceased before 20 September 1985. 24. Paragraph 2 of PCG 2019/5 states that if you disposeof an ownership interest in a dwelling that passed to you as an individual beneficiary or as the trustee of the deceased's estate within two years of the deceased's death, any capital gain or loss you make on the disposal is disregarded. The Commissioner has the discretion to extend the two year period. 25. Paragraph 3 of PCG 2019/5 states that, generally, we will allow a longer period where the dwelling could not be sold and settled within two years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first two years. 26. Paragraph 12 of PCG 2019/5 outlines the circumstances that take more than 12 months to resolve, which will be considered by the Commissioner: • the ownership of the dwelling, or the will, is challenged • a life or other equitable interest given in the will delays the disposal of the dwelling • the complexity of the deceased estate delays the completion of administration of the estate, or • settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of your control. 27. Paragraph 15 states that factors that would weigh in favour of the Commissioner allowing a longer period include those listed in paragraph 12 of PCG 2019/5 above. The absence of some or all of those favourable factors does not necessarily preclude us from allowing a longer period. | Detailed Reasoning - APPLICATION TO YOUR CIRCUMSTANCES: 28. Considering the provisions of subsection 118-195(1) of the ITAA 1997, a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if: a) you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and b) at least one of the items in column 2 and at least one of the items in column 3 of the table (see previous section) are satisfied; and c) the deceased was not an excluded foreign resident just before the deceased's death. 29. In this matter, the deceased acquired the Property in XX 19XX. As per Item 2 in Column 2 as set out in subsection 118-195(1) of the ITAA 1997, the deceased acquired the ownership interest before 20 September 1985. 30. The deceased passed away on x XX 20XX. 31. Following the deceased's death, the will was contested by three parties based on the deceased's testamentary capacity to make his last will. Each of the wills which the various parties propounded had different executors. 32. Following prolonged Supreme Court proceedings lasting a number of years, litigation was finalised in xx 20YY. Probate in solemn form was granted by the Supreme Court Probate Registry on yy YY 20YY. The Executors listed the property for sale for a number of weeks. The property was sold in YY 20YY. Settlement of the Property occurred on xx XX 20YY 33. As per Item 1 in Column 3 as set out in subsection 118-195(1) of the ITAA 1997, the applicant's ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner. 34. Having considered all the relevant facts and the Supreme Court proceedings, the Commissioner will apply the discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit until the date of settlement of the property and the date when the applicant's ownership interest ends. | Detailed Reasoning - CONCLUSION: The Commissioner will exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 to allow an extension to the 2-year limit, to the date of settlement, for the Capital Gains Tax ('CGT') exemption on the sale of the inherited dwelling that was the main residence of the deceased.