Private ruling: Subject Capital gains tax - deceased estate - extension two year period
Published: April 2014
Ruling period: Year ended 19 September 2015.
Date scheme commenced: 1 July 2013.

Ruling: Q1: Will the Commissioner exercise 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 and their late spouse purchased a property prior to 20 September 1985. The property was the deceased's and their spouse's main residence. The deceased's spouse passed away approximately X years ago and their interest passed to the deceased. You have chosen to continue to elect the property as the deceased main residence from when they moved into the nursing home until their death approximately Y months ago. The beneficiaries of the deceased estate are their children. The property will not be disposed of within the two year time limit due to the following: 1. The will of the deceased was disputed • the day after the deceased's date of death, you all became aware that the deceased's partner had married the deceased without the knowledge of the deceased's family and close friends. At the time of the marriage the deceased was a permanent resident in a in a nursing home. • the deceased's partner declared themself as the spouse of the deceased and claimed that their marriage as valid. The marriage superseded the deceased's will dated approximately Z years and approximately X years previously. You are all identified in both the deceased's wills as the sole executors and beneficiaries of their estate • a number of months ago you all commenced proceedings in challenging the validity of the deceased's marriage to the deceased's partner on the grounds of the deceased's impaired testamentary capacity supported by expert medical evidence • approximately X months ago the Supreme Court proceedings were settled at mediation. An appointed interim administrator to handle the deceased's estate until the appointment of a number of the beneficiaries as the ongoing administrators. 2. Delay in the grant of administration • Approximately X months ago paperwork was lodged for the grant of Administration via the interim administrator. Approximately two months ago it was found that the Supreme Court had misplaced the paperwork, which necessitated a new application, which was completed shortly after it was found that the paperwork was missing. 3. The complexity of the deceased's estate • the property was used by the deceased as storage for an exceptionally large collection of rare items, which they dealt in up to the time of their death • it is impossible to estimate the volume of items, possibly hundreds of thousands • it is expected that the sorting, organising and the consultation with experts regarding the items to determine their value prior to the disposal of the property will take some considerable time • this process was not able to be commenced prior to the resolution of the legal proceedings. 4. Difficulties in the beneficiaries attending to the deceased's estate • attending to deceased's estate is taking more time than anticipated due to the serious personal difficulties of a number of the beneficiaries assisting in the process of dealing with the contents of the property • one beneficiary suffered a serious medical condition almost X years ago, which has permanently restricted their abilities to assist in sorting and organising the contents of the property, which makes it more time consuming when dealing with the contents • another beneficiary has been a resident of a foreign country for more than Y years and they are only available to assist in decision making in relation to the contents of the property when they return to Australia. This beneficiary is limited in their ability to spend time in Australia as they have children. The property has been unoccupied since the grant of Administration and has not been used to produce assessable income during the period from the deceased's date of death and it will not be used to produce assessable income prior to its disposal. Settlement on the disposed of property will occur prior to a specified date.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 118-130(3) | Income Tax Assessment Act 1997 section 118-195 | Income Tax Assessment Act 1997 subsection 118-195(1)

Reasons for decision: Summary: A capital gain or capital loss is 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 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: n the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased) n an individual who had a right to occupy the dwelling under the deceased's will, or n 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, an interest in the property passed to you. 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. 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 will settle 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, the delay in disposing of the property were due to the will of the deceased being challenged along with other issues, such as the inability of some of the beneficiaries being available to assist with dealing with the deceased estate and these delays have prevented the disposal of the property 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 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 until a specified date.