Private ruling: Capital gains tax and deceased estate
Date of advice: 8 August 2018
Published: September 2018
Ruling period: 30 June 2017
Date scheme commenced: 1 July 2016

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 interest in the property that you acquired from X’s estate and allow an extension of time to the two year period? | A1: Yes | Q2: Will the Commissioner exercise his discretion under subsection 118-195(1) of the ITAA 1997 in relation to the interest in the property that you acquired from Y’s estate and allow an extension of time to the two year period? | A2: No

Relevant facts and circumstances: Y acquired a dwelling (the property) prior to 1985, becoming the main residence. You and X also occupied this dwelling for many years. In 20XX Y moved into a nursing home, X remained residing at the property. In 20XX Y passed away. From Y’s date of death, the property was bequeathed to X and you in equal shares, as per Y’s will. After Y’s passing, X remained in the dwelling as their main residence, as per Y’s wish. You had vacated the property by this time and you made a verbal agreement with X they could remain in the dwelling as their main residence for as long as they lived. There was no provision in Y’s will that included a life interest or a right to occupy the property to X. In 20XX, X passed away (deceased). The deceased’s share was bequeathed to you, giving you 100% sole ownership. Probate was granted and the property transferred into your ownership in 20XX. You were unable to attend to the deceased’s estate due to a personal reason and a health issue. The property was sold and settlement occurred in 20XX.

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 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 ● 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 exercising this discretion, the Commissioner is expected to consider whether and to what extent the dwelling is used to produce assessable income and the period that the trustee or beneficiary held the ownership interest in the dwelling. In your case, you acquired two separate interests in the property; one from Y’s estate and the other from X’s estate. As each of these interests is considered a separate asset for CGT purposes, we need to consider the discretion for each of these interests separately. | Detailed Reasoning - Interest acquired from Y’s estate: On the date of Y’s death, you acquired a half-share interest in the property. Although the property was acquired by Y prior to 20 September 1985, you, as a beneficiary of their estate, did not dispose of the property within two years of their death. Accordingly any capital gain made on the disposal of this interest in the property can only be disregarded if the Commissioner exercises his discretion to extend the two year period. As explained above, in considering the discretion the Commissioner is expected to take into account the period of time the trustee or beneficiary has held the property. In your case, you have requested a significant extension that is well in excess of the period of time the Commissioner would normally exercise the discretion. There was no circumstance that was unforeseen or that arose during the relevant two year period. Additionally, we consider your decision to retain the property to enable X to continue to reside in the dwelling a verbal private arrangement rather than an issue in finalising Y’s estate. Accordingly the Commissioner will not exercise his discretion to extend the two year period in relation to the interest in the property that you acquired from Y’s estate. | Detailed Reasoning - Interest acquired from X’s estate (the deceased): Following the deceased’s death in, you acquired the remaining half-share interest in the property. The deceased had occupied the property as their main residence at the time of their unexpected death and it had not been used to produce assessable income. However, as you have not disposed of the property more than two years following their death, you will only be able to disregard any capital gain made on this interest in the property if the Commissioner exercises his discretion to extend the two year period. On the passing of the deceased you encountered your own personal and health issues. Taking the above factors into account, in addition to the length of time in question (you have requested an extension of less than one year) the Commissioner will exercise his discretion to extend the time period to settlement date.