Private ruling: Capital gains tax - deceased estate
Published: August 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the Commissioner exercise his discretion to extend the two year main residence exemption on the sale of the deceased's main residence? | A1: Yes. | Q2: Is the estate required to include an amount in the net income under Division 6 of the ITAA 1936 by way of a capital gain in respect of the disposal of the Property in the year of income ended 30 June 2014? | A2: No. | Q3: Are the costs of administration of the estate and the costs including, rates, water service charges and maintenance associated with the Property form a part of the cost base of the Property? | A3: N/A. | Q4: Alternatively, is any one or more of the beneficiaries required to include an amount in their assessable income under section 97 of the ITAA 1936 in the year of income ended 30 June 20XX in respect of the transfer of the Property? | A4: N/A | Q5: If the Applicants and/or the beneficiaries were liable to include an amount in assessable income by way of a capital gain, would such a gain be a discount capital gain within Division 115 of the ITAA 1997? | A5: N/A

Relevant facts and circumstances: The deceased and spouse acquired the property prior to 20 September 1985. The spouse died prior to 20 September 1985. The deceased was then the sole owner of the property. The deceased and spouse had at all material times used the property as their main residence. The property was at no stage during the deceased's lifetime used to produce assessable income. The deceased died after 20 September 1985 leaving the property as the only real property in the deceased Estate. The deceased's adult child (life tenant) had at all material times lived with the deceased in the property. The deceased at all times intended to ensure that the life tenant continued to occupy and enjoy use of the property in the event of the deceased's death. The deceased left a Will dated 19XX In terms of the Will: a. Clause 5 thereof provided: I devise to my trustees the principal residence owned by me at the date of my death upon trust to permit my said child xxxx to have the use, occupation and enjoyment thereof he during that time paying all rates and taxes and other outgoings thereon and keeping the same in good and habitable state of repair (fair wear tempest excepted) and keeping the same insured to the satisfaction of my trustees and I empower my trustees either at the request of my said child xxxx or upon him leaving the said residence or upon xxxx marrying or upon xxxx entering into a de facto relationship and living at the said residence whichever event shall occur first to sell the said residence and I direct that the net proceeds of the sale shall fall into and form part of my residuary estate. b. Clause 6 provided that: I give devise and bequeath the rest, residue and remainder of my real and personal property of whatsoever nature and wheresoever situate to my Trustees upon trust to sell call in and convert into money all such parts thereof as shall not consist of ready money or of investment of the kind authorised hereby or by law for the investment of trust funds (with power to postpone such sale calling in or conversion thereof in the absolute and unfettered discretion without being liable to account notwithstanding that it may be of a wasting hazardous speculative or reversionary nature) and to pay or provide for my debts, funeral and testamentary expenses probate and estate duties any duties payable in respect of notional estate and any other duties payable on or by reason of my death all of which shall be a debt due by the resident of my estate and not apportioned and after such payment or provision as aforesaid to divide the balance then remaining between such of my children as shall survive me and if more than one as tenants in common in equal shares for their own use and benefit absolutely PROVIDED HOWEVER that if any of my children predecease me whether during or after my lifetime without attaining a vested interest hereunder and any child or children of such deceased child living at or born after the death of the survivor of such deceased child and me have attained or attains the Specified Age then such child or children of such deceased child shall take (if more than one as tenants in common in equal shares) the share of my estate which such deceased child would have taken had he or she attained a vested interest hereunder. Probate was granted approximately three months after the deceased's death to the Applicants. The Applicants allowed the life tenant to continue occupying the property as was provided in the deceased's Will. The life tenant paid all outgoings in respect of the property. The property was not used to produce assessable income subsequent to the death of the deceased. The property was constructed many years ago and was in need of substantial necessary structural improvements such as re-stumping, plumbing and the roofing required major repairs. The Applicants agreed with the life tenant that the property be sold and that the proceeds of the sale be utilised as follows: (a) a replacement property be acquired (the replacement property); (b) the replacement property be registered in the names of the deceased's children as provided in the Will. (c) the replacement property be occupied by the life tenant until they marry or enter into a de facto relationship as was provided in the deceased's Will. The Applicants settled the sale of the property approximately six years after the deceased's death. The Applicants have, in the circumstances, disposed of the property outside the two year period from the date of death of the deceased. This was due to the fact that the deceased's Will provided for a life tenant to occupy and enjoy use of the property. Circumstances have risen which have caused the Applicants to sell the property. However, consistent with the deceased's wishes expressed in their Will, the Applicants have procured the replacement property so that the life tenant would continue to have use and occupation of a property. This would be consistent with the wishes of the deceased as expressed in the Will. It is proposed that the Applicants would transfer the property from the Estate to the third party purchaser on the settlement date. The Applicants were, in the circumstances, unable to deal with the property within the two year period from the date of death of the deceased due to the express terms and conditions of the Will providing for the life interest of the life tenant in relation to the property. Had the Will not placed the restrictive condition entitling a life interest in the said property, the Executors would have been in a position to deal with the estate within the prescribed two year period from the deceased's date of death.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-195 | Explanatory Memorandum for the Tax Laws Amendment (2011 Measures No 9) Act 2012

Reasons for decision: Summary: Please note that all references are to the Income Tax Assessment Act 1997. Subsection 118-195(1) provides a capital gains tax (CGT) exemption to a beneficiary or trustee of a deceased estate where a CGT event happens to a dwelling (or an ownership interest in a dwelling) acquired from a deceased estate. An exemption is provided where the beneficiary or trustee's ownership interest in the dwelling ends within two years of the deceased's death and just before the deceased's death (for pre-CGT dwellings) the dwelling was their main residence. The Commissioner has discretion to extend the two year time period in subsection 118-195(1) where the trustee or beneficiary of a deceased estate's ownership interest ends after two years from the deceased's death. This discretion may be exercised 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: The deceased acquired the property after the death of the spouse prior to 20 September 1985 and it was the main residence of the deceased until death after 20 September 1985 at which time ownership of the property was transferred to the beneficiaries of the estate. The deceased's Will contained a clause instructing that a life tenant be allowed to live in the property: … to have the use, occupation and enjoyment thereof he during that time paying all rates and taxes and other outgoings thereon and keeping the same in good and habitable state of repair (fair wear tempest excepted) and keeping the same insured to the satisfaction of my trustees and I empower my trustees either at the request of my said child xxxx or upon xxxx leaving the said residence or upon xxxx marrying or upon xxxx entering into a de facto relationship and living at the said residence whichever event shall occur first to sell the said residence and I direct that the net proceeds of the sale shall fall into and form part of my residuary estate. There is therefore a period of almost six years from the date of the deceased's death until the property was sold under a contract. You were prevented from selling the property due to the deceased's Will allowing a life tenant to live in the property. The delay in selling the property under these circumstances was beyond your control. Having considered the facts as outlined above, 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 to allow you an exemption due to the complexity of the administration of the deceased's estate.