Private ruling: Capital gains tax - deceased estate – Commissioner’s discretion to extend the two year period – main residence exemption
Date of advice: 3 April 2018
Published: June 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) in relation to the dwelling on the property and allow an extension of time to the two year period to the date of settlement of the property? | A1: Yes

Relevant facts and circumstances: The deceased acquired the residential property pre 1985 The deceased passed away a number of years ago The property was valued at the deceased’s date of death The dwelling on the property was the principal place of residence of the deceased for all of the ownership period up to death Since the deceased’s death the deceased’s descendant has been living in the property and treating it as the main residence Probate was granted a number of years after the deceased’s death The property was held by you as Trustees of the Estate from the date of death until its sale and settlement A Clause of the deceased’s will indicates that the whole of the estate is to be divided in equal shares absolutely between the living children There was an Agreement the trustee of the estate and the deceased’s descendant to acquire the whole of the property An independent valuer provided the market value of the property at the time of the transfer The delay in selling the property was due to the following reasons: ● the trustee held the will (final will) for the deceased ● The final will appointed the trustee as the executor and trustee ● At a later date there was another will (second will) made which removed the trustee as an executor and replaced them with the deceased’s descendant A as an executor and sole beneficiary ● Subsequently the trustee closed the file as it understood that the final will had been revoked. The trustee made attempts to communicate with the family but without success ● The deceased’s descendant B contacted the trustee requesting a copy of the final will. The trustee provided a copy to descendant B’s lawyer ● One of the executors appointed under the second will delayed the grant of probate due to the contents and validity of the second will ● There were numerous meetings and discussions between the trustee’s lawyers and the lawyers for the executors and beneficiaries ● There was further delay by an executor of the second will, delaying the grant of probate and refusing to cooperate with the lawyers ● The deceased’s final will was lodged with the relevant authority ● Probate was granted to the trustee ● The property was subject to a mortgage and further delays were experienced by the trustee in dealing with the bank and the repayment of the mortgage prior to the sale of the property ● The trustee sought the guidance and advice from an external legal expert in an attempt to rectify the matter. Further delays were experienced in the administration stages ● After many phone calls the mortgage was discharged in full ● It was confirmed that the deceased’s descendant may want to purchase the property from the estate ● A copy of an independent valuation of the property was provided to each beneficiary requesting the deceased’s descendant to submit a formal offer ● Follow-up with the beneficiaries occurred periodically and the trustee was waiting for the beneficiaries to confirm instruction ● A letter to the deceased’s descendant was sent requesting he make a formal offer or the trustee would instruct agents to sell the property. The deceased’s descendant then provided a written offer of purchase ● The Agreement between the trustee and the deceased’s descendant was made to transfer the property to the deceased’s descendant. Certain documents were provided to support these statements.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10, | Income Tax Assessment Act 1997 Subsection 118-130(3) and | Income Tax Assessment Act 1997 Section 118-195.

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), or ● from the deceased's death until the trustee's ownership interest ends, the dwelling was the main residence of one or more of the following persons: (a) the spouse of the deceased immediately before death; or (b) an individual who had a right to occupy the dwelling under the deceased's will; or (c) an individual who brought about the CGT event and the ownership interest in the dwelling passed to that individual as beneficiary. In this case, the property was purchased by the deceased before 20 September 1985 and was their main residence until they passed away. The property was not sold within two years of the deceased’s date of death. The property was not a main residence of a relevant person under section 118-195 of the ITAA 1997. 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 factors mitigating against exercising it. You will only be able to disregard the capital gain from the sale of the property if the Commissioner extends the two 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 In your case, the delay in disposing of the dwelling within the two year time period was due to a legal issue that arose concerning the interpretation and validity of the deceased’s will, resulting in the delay in probate being granted, additionally delays were encountered in dealing with the discharge of the mortgage and from an uncooperative beneficiary. Having considered the circumstances and the factors outlined above, the Commissioner is able to apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension of time until the date of settlement of the property.