Private ruling: Capital Gains Tax - deceased estate
Published: May 2014
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: A1: No.

Relevant facts and circumstances: The property is at address X. The deceased had lived in the property as the family home before 1985. The deceased had two children, A and B. A left the family home in the 1990's and currently resides in City Y. B had always been living in the family home, and became a full time carer for the deceased when the deceased could not self-medicate. The deceased died a few years ago, leaving the family home (property) as the only real asset of the estate. The Will appointed B as the Executor and Trustee of the deceased estate. Apart from the Will, the deceased also left an unsigned Will which contained some additional provisions. B first spoke to A about the unsigned Will X months after the deceased's death. A and B had a dispute over the validity of the unsigned Will. Numerous discussions were held between A, B and the Solicitor for Probate in an attempt to solve the dispute. The Solicitor for Probate suggested that the probate application for the signed Will could include a reference to the unsigned Will and would proceed on that basis. As a result the granting of probate on the signed Will occurred X months after the deceased's death. However, an answer to the unsigned Will was still sought later on and finally obtained on XX months after the deceases death: • In a letter from B to A's solicitor, dated YY months after the deceased's death, the question was asked without answer. • In a letter from B's solicitor to A's solicitor, dated ZZ months after the deceased's death, the question was again asked without answer. • Finally in a letter, dated XX months after the deceased's death, A's solicitor advised B's solicitor that A did not accept this as a valid Will and would oppose any application to the Court to have it considered as a valid Will. According to the Will, A and B would become "tenants-in-common" of the property in equal shares. It was not mentioned in the Will that a "right to occupy" of the property was given to the beneficiaries, the Trustee, or any third party. A and B also had a prolonged argument over whether or not and how to sell the property, which started 13 months after the deceased's death and lasted until the sale of the property. Due to health issues, B was not able to attend to the deceased estate matters as the Trustee for about X month. This happened about XX months after the deceased's death. The property was sold by the trustee of the deceased estate by public auction XY months after the deceased's death, with a three month settlement period. The property had been held by the trustee of the deceased estate and never been transferred into the beneficiaries' names. The property had never been vacant or used to produce assessable income. B had lived in the property since before the deceased's death until the settlement of the sale of the property, as B's main residence. B managed to rent the property from the purchaser and kept living in it as a tenant after the settlement. A had never lived in the property after the deceased's death.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-110. | Income Tax Assessment Act 1997 subsection 118-130(3). | Income Tax Assessment Act 1997 section 118-195.

Reasons for decision: Summary: A capital gain or capital loss is disregarded under section 118-195 of the ITAA 1997 where a CGT event happens to a dwelling if it passed to you as an individual beneficiary of a deceased estate or you owned it as the trustee of the deceased estate. The availability of the exemption is dependent upon: • - who occupied the dwelling after the date of the deceased's death, or • - whether the dwelling was disposed of within two years of the date of the deceased's death. For a dwelling acquired by the deceased, you will be entitled to a full exemption if: • the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of the following relevant individuals: • the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased) • an individual who had a right to occupy the dwelling under the deceased's will, or • an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary, or • your ownership interest ends within two years of the deceased's death. In your case, when the deceased died, the property passed to you as the Trustee of the deceased estate. The property was the deceased's main residence prior to death, and at that time, was not being used to produce assessable income. However, the property was not occupied by a "relevant individual" after the deceased's death and therefore this basis of exemption is not available. Please note, given your situation, being a "tenant-in-common" might give you the "right to occupy". However, subsection 118-195(1) requires that, to be a "relevant individual", you had to have a right to occupy the dwelling "under the Will". ATO ID 2003/109 further interprets the law, which is well relevant to your case: An individual would be considered to occupy a dwelling under the deceased's will if it was in accordance with the terms of the will. This would also be the case if it was in pursuance of the will or under the authority of the will (see Evans v. Friemann (1981) 53 FLR 229 at 238). In this case, the beneficiary had no right under the will to reside in the house. The beneficiary resided in the house because the executors and other beneficiaries so agreed. This outcome is consistent with the general rule of construction that the intent of the deceased must be ascertained from the words of the will and that one cannot speculate or guess after that intention. (see Certoma, GL 1987, The Law of Succession in New South Wales , The Law Book Company, Sydney, p. 117) As the beneficiary did not have a right to occupy the dwelling under the will, the trustee cannot disregard the capital gain made on the disposal of the dwelling. In your case, it was not mentioned in the Will that a "right to occupy" of the property was given to either of the beneficiaries, the Trustee, or any third party. That is, it was not "ascertained from the words of the Will" that you had the right to occupy the dwelling. Therefore, you are not a relevant individual on that basis. 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. The property sale settled more than two years after the deceased's death, therefore, the alternative basis of exemption is also not satisfied. However, subsection 118-195(1) of the ITAA 1997 confers on the Commissioner discretion to extend the two year exemption period, thus this alternative basis of exemption in the provision may apply. 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 • 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 reasons outside the beneficiary or trustee's control. In your case, • there was a dispute over the unsigned Will, which caused a delay of the probate of the signed Will for about X months; • an answer of the unsigned Will was obtained XX months after the probate of the signed Will, during which time B kept asking questions but no answer was provided by A's solicitor; • the house was the only real asset in the estate and it was the main focus of the dispute between the beneficiaries, therefore there was no complexity of the estate; • you, as the Trustee of the estate, were not able to attend to the deceased estate matters due to health issues for approximately X months, YY months after the deceased's death; • there had been no issue with the settlement of the contract of property sale; • the delay in disposing of the property was approximately ZZ months over the two-year period after the deceased's death. The key fact being looked at here is whether the delay was caused by reasons outside of the beneficiaries or Trustee's control. In your case, apart from the health issue happened to the Trustee, the dominant reasons of the delay were all because of lengthy disputes between the beneficiaries. That is, the delay was not out of the beneficiaries' control. Therefore, the Commissioner will not exercise the discretion to extend the two year exemption period. As the result, any capital gain or loss you, as the Trustee of the deceased estate, make from the disposal of the deceased estate property will not be disregarded.

Question and answer: Will a capital gain or loss you, as the Trustee of the deceased estate, make from the disposal of the deceased estate property disregarded under the Income Tax Assessment Act 1997 (ITAA 1997)?