Private ruling: Capital gains tax exemption
Date of advice: 14 January 2016
Published: March 2016
Ruling period: Year ended 30 June 20XX | 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 to dispose of the inherited dwellings? | A1: Yes

Relevant facts and circumstances: The deceased passed away in 200X. At the time of their death, they owned two dwellings, Property A and Property B. Both properties had been acquired prior to 20 September 1985. The deceased passed away intestate. The deceased had several surviving relatives. In 200X, one relative entered a caveat in the Probate Registry of the Court. The caveat was renewed every six months between 200X and 20XX. In 200X, a Summons was issued by other relatives as plaintiffs, against other members of the deceased's family as defendants, seeking orders for production of documents including any will. The action was resolved by the production of documents and information without orders. In 200X one relative made an application for probate in respect of an alleged will of the deceased. That application could not proceed because of the caveat. It was dismissed, for technical reasons, in 20XX. In 20XX a subpoena was issued at the request of one relative, requiring a related party to bring an alleged will into Court. The alleged will was produced. In 20XX a number of relatives as plaintiffs filed a summons in the Civil Registry seeking a declaration that the alleged will was invalid. The parties attended several failed Settlement Conferences and a Mediation session. In 20XX an agreement was reached between the relative's. On the same day, the Terms of Compromise was settled between the parties which outlined the following: • The will was found invalid • The counterclaim lodged by the defendant was dismissed • The deceased had died intestate • One relative would receive a specified sum of money • Another relative would obtain a grant of Letters of Administration for the deceased estate and would be the Trustee of the deceased's estate On the same day the Terms of Compromise were made a Rule of Court by Order in the Supreme Court. The trustee made an application for letters of administration of the estate of the deceased on the footing that they had died intestate. In 20XX, orders were made pronouncing against the validity of the will. The orders had the effect of removing a further caveat that had been entered in 20XX and renewed to 20XX. Letters of Administration of the deceased's estate were granted by the Supreme Court in 20XX, and the Trustee appointed for the deceased's estate. Settlement on the disposal of Property A occurred in 20XX. Settlement on the disposal of Property B occurred in 20XX.

Relevant legislative provisions: 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). You have an ownership interest in a property if you have a legal interest in the property. This means that if you sell a property, your ownership interest continues until the date of settlement (rather than the date the contract of sale is signed). In this case, the properties were purchased by the deceased before 20 September 1985. The property was not sold within 2 years of the deceased's date of death. You will only be able to disregard the capital gain from the sale of the property if the Commissioner extends the 2 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 this case, there was a delay in administering the estate due to a number of reasons, including: - a dispute regarding the validity of a will which was which was ultimately declared invalid - an unsuccessful application for probate, and other legal action. - caveats having been placed over the properties between 200X and 20XX - the Administrator of the estate was physically prevented from being able to perform his/her duties by other members of the deceased's family - the Administrator made application through Court Order in 20XX to be granted access to the assets of the estate. The application was not heard until 20XX. All assets were sold within two years of the Letters of Administration being granted. 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 to the two year time limit.