Private ruling: Capital gains tax - deceased estate - Commissioner's discretion
Published: October 2014
Ruling period: Year ended 30 June 2014.
Date scheme commenced: 1 July 2013.

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? | A1: Yes.

Relevant facts and circumstances: The deceased, your parent, died in late 20XX. The deceased had owned the dwelling and, prior to their death, jointly with their spouse, who died previously. It had been their main residence. The dwelling was inherited by their children, who are also executors of the estate. You have had X years traumatic experience, which set in months after one parent passed away unexpectedly; in late 200X. Following your first parent's death you discovered your other parent had a medical condition. It progressed aggressively and was accelerated by grief and many years of another medical condition. At times authorities were involved due to their behaviour and they were eventually hospitalized. They had accidents resulting fractured limbs. This and the gradual decline of their faculties culminated in the dreadful decision you had to make to not have them treated should a condition occur, as they were just lying there in bed with minimum movement with no consciousness. After your second parent died, it took you time for you to feel ready to clear the dwelling as you were still traumatized by both parents passing away within a relatively short period of time and the events of the past years. You thought of renting out the dwelling but decided it was not rentable because of its condition. You decided to put it up for sale as soon as possible. You applied for Probate and obtained it on the a date after which you took steps to have the dwelling placed on the market. Further delay was caused by having to change the title on the property from your parent as survivor and then to yourselves as executors. It was only then that you became aware of the requirement to sell within the two year period after which you would incur capital gains tax. By a month we had a few offers from developers, which fell through. By end of a date you had a real offer with the condition of waiting three months for loan approval. The loan was approved and the contract of Offer and Acceptance of sale as a development property progressed by both parties by a date with settlement date being 28 days from the date of finance approval. You request that the Commissioner to grant an extension of the two year period to a date; the settlement date.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 118-130(3) | Income Tax Assessment Act 1997 section 118-195 Explanatory memorandum to the Taxation Laws Amendment Bill (No.9) of 2011 (Cth)

Reasons for decision: Summary: A capital gain or capital loss may be disregarded under section 118-195 of the ITAA 1997 where a capital gains tax event happens to a dwelling if it passed to you as an individual and a beneficiary of a deceased estate or you owned it as the trustee of the deceased estate. For a dwelling acquired by the deceased prior to 20 September 1985, 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 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 the CGT event was brought about by that person, or • your ownership interest ends within two years of the deceased's death. In your case, when the deceased died, an interest in the dwelling passed to you. The dwelling was the deceased's main residence prior to death, and at that time, was not being used to produce assessable income. However, the dwelling was not occupied by a relevant individual after the deceased's death and therefore this basis of exemption is not available. 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 dwelling 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. 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. The delay in disposing of the dwelling was caused by unexpected delays in the settlement of the dwelling for reasons outside the beneficiary or trustee's control and these delays prevented you from disposing of the dwelling within the two year time limit. In determining whether or not to grant an extension the Commissioner is also expected to consider whether and to what extent the dwelling is used to produce assessable income and how long the trustee or beneficiary held it. Having considered the relevant facts, the Commissioner will apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit until a date.