Private ruling: CGT Deceased Estate Main Residence Section 118-195 Commissioner's Discretion 2 year rule
Date of advice: 27 November 2015
Published: May 2016
Ruling period: Period ending 30 June 201X
Date scheme commenced: 1 July 201X

Ruling: Q1: Will the Commissioner exercise his discretion to extend the time period in subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) where the trustee or beneficiary of a deceased estate’s ownership interest in a dwelling ended more than two years from the deceased’s death? | A1: Yes

Relevant facts and circumstances: The deceased died on a date in 201X. The dwelling was her main residence immediately before her death and was not being used to earn income. Prior to the deceased inheriting the land it was a pre-CGT asset. The land at the rear of the dwelling was used for income earning purposes before and after the deceased’s death. The adjoining blocks of land also form part of the estate. The dwelling is considered distinct to the adjacent land that has been used for income earning. The deceased appointed her children as joint executors. They experienced extreme difficulties working together. There were numerous delays in achieving probate and administering the will. In 201X some of the trustees began court action to remove others. In 201X, the court removed all executors and replaced them with a court appointed executor, who then began the process of preparing the assets of the estate for sale. After a number of further delays, legal and otherwise, the property was sold at auction in 201X to some of the beneficiaries.

Relevant legislative provisions: Section 118-195 of the Income Tax Assessment Act 1997 | Explanatory memorandum to the Taxation Laws Amendment Bill (No.9) of 2011 (Cth)

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 that a deceased person acquired after 20 September 1985 if: ● the dwelling was the main residence of the deceased at the time of the deceased's death; and ● your ownership interest ends within two years of the deceased's death, or within a longer period allowed by the Commissioner. In your case, the dwelling was the deceased’s main residence just before their death, and was not being used to produce assessable income. Although your ownership interest in the dwelling did not end within two years after the date of the deceased’s death, in view of your particular circumstances the Commissioner will exercise his discretion to extend the two year exemption period until a date in 201X. The sale of the property will therefore not be subject to CGT. The Explanatory Memorandum for the Tax Laws Amendment (2011 Measures No. 9) Act 2012 explains the Commissioner would be expected to exercise discretion (in sections 118-195 and 118-200) 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. These examples are not exhaustive. 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. | Detailed Reasoning - Application of Commissioner’s discretion in your case: In your case, following the guidance in the Explanatory Memorandum, the Commissioner will exercise his discretion under section 185-195 of the ITAA 1997 on the grounds that the particular complexities of the estate and the legal issues arising made a timely resolution impossible, despite the efforts of various executors. In addition, the dwelling itself has not been used to produce assessable income.