Private ruling: Deceased estate
Date of advice: 16 January 2019
Published: May 2019
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the Commissioner allow extensions of time under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) for you to dispose of your ownership interest in properties A, B, and C, and disregard the capital gains or losses you made on these disposals? | A1: Yes. | Q2: Will the Commissioner allow an extension of time under subsection 118-195(1) of the ITAA 1997 for you to dispose of your 50% ownership interest in property D which the deceased acquired on before 20 September 1985 (pre-CGT interest)? | A2: Yes. | Q3: Is the capital gain made on your disposal of the deceased’s pre-CGT interest in property D fully exempt under section 118-195 of the ITAA 1997? | A3: Yes | Q4: Will the Commissioner allow an extension of time under subsection 118-195(1) of the ITAA 1997 for you to dispose of your 50% ownership interest in property D which the deceased acquired after 20 September 1985 (post-CGT interest)? | A4: No. | Q5: Are you entitled to a partial exemption under sections 118-200 and 118-190 of the ITAA 1997 in relation to the capital gain made on your disposal of the deceased’s post-CGT interest in property D? | A5: Yes | Q6: Will the Commissioner allow an extension of time under subparagraph 118-200(3)(b)(ii) of the ITAA 1997 for you to dispose of the deceased’s post-CGT interest in property D, enabling you to adjust the formula to calculate the partial exemption available? | A6: Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The deceased inherited property A, and purchased property B and C, before 20 September 1985. These properties were investment properties, used to produce assessable income. The deceased and their spouse purchased property D before 20 September 1985. The property consists of a main house, and a self-contained bungalow. This property was the deceased and their spouse’s main residence until each of their deaths. No significant improvements were made to properties A, B, C, and D which may have created a new asset for CGT purposes after 20 September 1985. In late 20XX, the deceased’s spouse died and their share in property D passed to the deceased as the surviving joint tenant. The deceased was the executor of their spouse’s estate. From 20XX to 20XX, the bungalow on the deceased’s main residence property was rented to an unrelated party. This tenant only resided in the bungalow and the main house itself remained vacant after the deceased’s death. The deceased died in early 20XX before the estate of their spouse was fully administered. The deceased had two valid wills, and probate was granted to both wills by the Court. Due to the inconsistent and contradictory nature of these two wills, a court case arose to determine how the two separate and valid wills should be used to execute the Estate. The legal matters of this case, and the complications created by the deceased dying before their spouses estate could be fully administered, led to significant delays in executing the estate of the deceased. Judgement was handed down in early 20XX and detailed how the before mentioned properties should be treated under the conditions of the two wills, allowing properties disposals to commence. Properties A, B, C, and D were sold shortly afterwards.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-190 | Income Tax Assessment Act 1997 Section 118-195 | Income Tax Assessment Act 1997 Section 118-200

Reasons for decision: Summary: Subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) allows a trustee of a deceased estate to disregard a capital gain or loss from a dwelling 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). The following is a non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion: ● the ownership of a dwelling or a will is challenged, ● the complexity of a deceased estate delays the completion of administration of the estate, or ● settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for reasons outside the beneficiary or trustee's control. Section 118-200 of the ITAA 1997 may also allow a partial exemption where an individual acquires an ownership interest as a beneficiary or trustee of a deceased estate and section 118-195 of the ITAA 1997 does not apply. The partial exemption is calculated in accordance with the formula provided in subsection 118-200 of the ITAA 1997. Under subsection 118-200(3) of the ITAA 1997, where the deceased acquired the interest post-CGT and your ownership interest ended within either 2 years of the deceased death or a longer period allowed by the Commission, the formula used to calculate the capital gain or loss made upon disposal may be adjusted to ignore total days and non-main residence days in the time period between the deceased’s death and your ownership interest ending. The circumstances under which the Commissioner would use their discretion to grant an extension of time under section 118-200 of the ITAA 1997 is similar to that of section 118-195 of the ITAA 1997. A partial exemption under section 118-200 of the ITAA 1997 may be further reduced if the property was used to produce assessable income (section 118-190 of the ITAA 1997). The assessable gain is increased having regard to the extent to which interest on money borrowed to purchase the dwelling would have been deductible. | Detailed Reasoning - Application to your case: Properties A, B, and C were acquired by the deceased before 20 September 1985 (pre-CGT) and used to produce assessable income. In this case, there were extenuating circumstances which prevented each of these properties from being disposed of within 2 years of the deceased’s death. Under these circumstances, the Commissioner will exercise their discretion and allow an extension of time under section 118-195(1) of the ITAA 1997. Therefore the capital gains or losses made from the disposal of properties A, B, and C may be disregarded. Property D was the deceased and their spouse’s main residence until each of their deaths. In regards to this property the deceased had two ownership interests: 50% acquired before 20 September 1985 upon purchase (pre-CGT interest), and 50% acquired after 20 September 1985 upon their spouses death (post-CGT interest). Additionally, after their spouse’s death, a bungalow on the property (separate to the main house) was rented to an unrelated third party. The tenant continued to reside in the bungalow after the deceased’s death up until the property disposal. Pre-CGT Interest Due to the extenuating circumstances which prevented the property from being disposed of within 2 years of the deceased’s death, the Commissioner will exercise their discretion and allow an extension of time under section 118-195(1) of the ITAA 1997. Accordingly, any capital gain made on the disposal of this interest in property D is disregarded. Post-CGT Interest Section 118-195 of the ITAA 1997 does not apply to post-CGT interests where the dwelling is used to produce assessable income. In this instance, section 118-200 of the ITAA 1997 may be applied to allow a partial exemption. Due to the extenuating circumstances which prevented the property from being disposed within 2 years of the deceased death, the Commissioner will grant an extension of time under section 118-200(3)(b)(ii) of the ITAA 1997 which enables you to adjust the formula to calculate the partial exemption available under section 118-200 of the ITAA 1997. As property D was being used to produce assessable income, the assessable gain made in relation to the post-CGT interest will also need to be increased according to section 118-190 of the ITAA 1997.