Private ruling: Capital gains tax – deceased estate – Commissioner’s discretion to extend the two year period – main residence exemption
Date of advice: 11 April 2018
Published: June 2018
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

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 | Q2: Can the taxpayer disregard the capital gain that arises from the disposal of the property under section 118-195 of the ITAA 1997? | A2: Yes

Relevant facts and circumstances: The deceased died in XXXX. The deceased left a Will appointing their spouse to be the executrix and trustee of the estate The deceased and the deceased’s spouse were tenants-in-common in a main residence (the property) A clause of the Will provided a right of use and occupation of the deceased’s share of the property to the spouse during their lifetime Another clause of the Will provided for the distribution of the residuary estate upon the death of the deceased’s spouse The deceased’s spouse continued residing in the property until their date of death, the deceased’s estate then went into final administration The deceased and the deceased’s spouse resided at the property at their time of death The property was left vacant from the deceased’s spouse’s date of death to when it was sold, it was not used for income producing activities The property is less than two hectares in size The property has been sold as part of the finalisation of the estate’s administration The sale contract was signed and the property settled in XXXX A is the executrix of the deceased’s spouse’s Estate. Pursuant to the chain of executorship, on the death of the deceased’s spouse, A is the executrix and trustee of the deceased’s Estate.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10, | 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 two 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 the deceased’s main residence when they died and the trustee's ownership interest in the dwelling ended more than two years after the date of the deceased's death. 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. The following is a non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion to extend the time period in which you can dispose of the property: ● 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 this case, the delay in selling the property was caused by the complexity of the deceased’s estate. The deceased’s spouse was a tenant in common with the deceased and continued residing in the property on their own share of the property and on the deceased’s share under a right of occupancy. The sale of the property could not occur until the expiration of the life interest, which did not occur until the deceased’s spouse’s death. This impediment prevented you from disposing of the property within the two year time limit. The sale of the property occurred within a reasonable time following the death of the deceased’s spouse. Therefore, the Commissioner accepts that it is appropriate to grant the extension to the settlement date. As the Commissioner has granted the extension of time the capital gain that arises from your share of the property can be disregarded.