Private ruling: CGT - deceased estate - extension of time
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. | Q2: Can you disregard any capital gain or loss that arises from the disposal of the property under section 118-195 of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: A (the deceased) and B purchased a property as joint owners after 21 September 1985. A mortgage was taken out on the property to provide working capital for C's business. The mortgage was taken with in country X with an international subsidiary of an Australian bank. A, B and C were joint borrowers. A and B were born in country X and naturalised as Australian citizens. B passed away and the property became fully owned by A. A, as the sole executor of B's Will, obtained grant of probate in Australia. B did not hold any assets in a country at the time and A did not consider it necessary to prove B's will in country X. A passed away on 22 November 2008. The property had never been used to produce assessable income and was continuously used as A's main residence until their passing. After A passed away, C (as the only remaining original borrower) fully discharged the Australian mortgage on the property. The executor of A's Estate then requested the international subsidiary to release the title of the property. The international subsidiary was of the view that the mortgage on the property constituted a liability in country X, despite not having any assets there, a grant of representation was required from the High Court of country X in respect of both A and B's Estates before the international subsidiary would discharge the mortgage and release the title of the property. The executor commenced the process to obtain a grant of representation of the deceased's Estate in country X, which was a prerequisite to obtaining a grant of representation over B's Estate. This was a complicated and time consuming process, requiring significant documentation which required authorising in both Australia and country X. There were many rounds of correspondence and resubmissions to the High Court in country X citing both local legislation and international legislation. This complexity delayed the completion of the administration of the Estate. The whole process took almost four years in country X in order for the international subsidiary to agree to release the title over the property, despite the mortgage being fully repaid. After the deceased's death, the property was occupied by relatives, free of charge, for a period of time. The property was rented out in some time later, due to the prolonged process to obtain a discharge of the mortgage on the property, in order to avoid the dilapidation of the property if left vacant and the risk of illegal squatters. The property was sold as soon as practicable, upon obtaining clearance of the title.

Relevant legislative provisions: Income Tax Assessment Act 1997 (ITAA 1997) section 118-195 | Income Tax Assessment Act 1997 (ITAA 1997) section 118-190

Reasons for decision: Summary: A capital gain or capital loss you make from a capital gains tax (CGT) event that happens in relation to a dwelling or your ownership interest in it is disregarded if: (a) you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and (b) at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied. | Detailed Reasoning - And also one of these items: 1 the deceased *acquired the *ownership interest 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 your *ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner ........... 2 the deceased *acquired the *ownership interest before 20 September 1985 the *dwelling was, from the deceased's death until your *ownership interest ends, the main residence of one or more of: (a) the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or (b) an individual who had a right to occupy the dwelling under the deceased's will; or (c) if the *CGT event was brought about by the individual to whom the *ownership interest *passed as a beneficiary - that individual In this case, when the deceased died the property passed to the legal personal representative. The property was not used to produce assessable income and it was their main residence just before their death. You will only be able to disregard the capital gain from the sale of the property if the Commissioner extends the time period in which you can choose to dispose of the property. 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 (eg 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 determining whether or not to grant an extension the Commissioner is expected to consider whether and to what extent the dwelling is used to produce assessable income and how long the trustee or the beneficiary held it. In this case, the delay caused by the complexity of administering the deceased's Estate was out of your control. Having taken approximately four years for the property to be released by the international subsidiary, it was not possible to dispose of the property within the two year period. The property was eventually sold shortly after its release. Due to the prolonged process to obtain a discharge for the mortgage on the property, it was rented out for a period of time. The decision to rent the property was made in order to avoid dilapidation of the property and the risk of illegal squatters, while it was left vacant and unable to be sold. Generally, where the property is used to produce assessable income, you would not normally be entitled to a full main residence CGT exemption. Subsection 118-190(4) of the ITAA 1997 disregards the fact the property was used to produce assessable income during this time, given it was the deceased's main residence just before their death and had not been used to produce assessable income at that time. 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. As a result of extending the two year time limit, you will satisfy all of the conditions contained in section 118-195 of the ITAA. Accordingly, you can disregard any capital gain or loss that arises as a result of the disposal of the property.