Private ruling: Capital gain tax-deceased estate-Commissioner’s discretion to extend the two year period-main residence exemption
Date of advice: 14 February 2018
Published: June 2018
Ruling period: 30 June 2018
Date scheme commenced: 1 July 2017

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: No

Relevant facts and circumstances: S acquired a dwelling before 20 September 1985 (the dwelling). S passed away (the deceased). The dwelling was the deceased’s main residence and was not used to produce income. The dwelling formed part of the deceased’s estate (S’s estate) The deceased’s will appointed the deceased’s children T and U as the executors of the deceased’s will (the executors). The executors were also beneficiaries of the deceased’s estate. The will provided for the deceased’s estate to be distributed to the beneficiaries in equal shares as tenants in common. U renounced the role of executor. A Grant of Probate of the deceased’s will was granted to T. T resided in the dwelling at the time of the deceased’s passing. The executor and beneficiaries entered into a deed allowing T to reside in the dwelling for life, as they believed it was the intention of the deceased for T to continue to reside in the dwelling during T’s lifetime. T passed away. T’s child V was appointed legal personal representative of T’s estate (T’s estate). T died without having fully administered S’s estate. The administration of T’s estate was delayed due to a dispute between U and V, which resulted in court proceedings. Letters of administration of T’s estate were granted to T’s child V. Documents were filed by legal practitioners on behalf of U and V, administrators of S’s estate (you), to obtain letters of administration of S’s estate. Letters of administration of the S’s estate were delayed due to the following reasons: ● It took over a month to respond to court requisitions. ● The requisitions required an exemplification of the grant of probate originally obtained by T. Letters of administration of S’s estate were granted to U and V and the deceased’s dwelling was transferred into the names of U and V. U and V were unable to agree on the appointment of a real estate agent to sell the dwelling and an agent was appointed on your behalf. Furniture and personal affects which belonged to T were removed from the deceased’s dwelling by U and V over a two week period prior to commencing to market the dwelling for sale. The dwelling was sold, with a 12 week settlement period entered into with the purchaser. The purchaser failed to complete the contract on time and U and V’s solicitor issued the purchaser with a notice to complete. The settlement of the sale of the dwelling was completed. The deceased’s dwelling remained vacant from the time of T’s passing until it was sold. During the time that U and V retained ownership of the deceased’s dwelling, it increased in value and a higher sale price was realised.

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 | Income Tax Assessment Act 1997 subsection 118-195(1)

Reasons for decision: Summary: The Commissioner will not exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time until 28 September 2017. | Detailed Reasoning - Detailed reasoning: In certain circumstances, section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the trustee of a deceased estate may disregard an assessable gain or loss made from the disposal of a property that passed to them in their capacity as trustee of a deceased estate. In relation to dwellings acquired by a deceased person before 20 September 1985 but who passed away after that date, one of the circumstances for the exemption under section 118-195 of the ITAA 1997 to apply is that the dwelling needs to be disposed of by the trustee within two years of the date of death or alternatively, the dwelling needs to be the main residence of one or more of the following persons: ● the spouse of the deceased immediately before death; or. ● an individual who had a right to occupy the dwelling under the deceased's will , or ● an individual who brought about the CGT event and the ownership interest in the dwelling had passed to that individual as beneficiary However, the Commissioner has the power under section 118-195 of the ITAA 1997 to extend this two year period. Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example: ● the ownership of a property 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 ● the settlement of a contract of sale over the property is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee’s control. These examples are not exhaustive, but provide guidance on what factors the Commissioner would consider reasonable to exercise his discretion to extend the two year period to dispose of an inherited property. In exercising the discretion the Commissioner will also take into account whether and to what extent the property is used to produce assessable income and for how long the trustee or beneficiary held the ownership interest in the property. Whether the Commissioner will exercise his discretion under subsection 118-195(1) of the ITAA 1997 will depend on the facts of each case. | Detailed Reasoning - Application to your situation: The Commissioner expects a trustee or beneficiary of a deceased estate to make reasonable enquiries about matters that affect the administration of the estate. T as the executor of the S’s estate and U as beneficiary, entered into a formal arrangement as part of a deed for T to reside in the deceased’s dwelling for life on the condition T satisfies the requirements of the deed. T continued to occupy the dwelling from the deceased’s date of passing up until T’s passing. This was for a period in excess of 10 years. T as executor and beneficiary of the deceased’s estate had no right under the will to reside in the dwelling. T was able to reside in the dwelling because of an agreement T entered into with the other beneficiary. Sub section 118-195(1) of the ITAA 1997 allows for a capital gain or loss to be disregarded in the case of a beneficiary who resided in the deceased’s dwelling from the deceased’s date of death until their ownership interest ends, provided the beneficiary brings about the CGT event. While T resided in the deceased’s dwelling at the time of the deceased’s passing, the CGT event, being the sale of the deceased’s dwelling was not brought about by T. The administrators of S’s estate, being U and V brought about the CGT event by arranging for the deceased’s dwelling to be sold. There was no legal or physical impediment by U and V that contributed to the delay in disposing of the deceased’s estate. While we acknowledge that it took some months to obtain administration of S’s estate, due to an inactive email address and obtaining a grant of exemplification, the process of obtaining letters of administration did not commence until a significant time following the deceased’s passing. Similarly, while there was a relatively short delay in appointing a real estate agent to sell the deceased’s dwelling and short delay in the settlement of the sale of the deceased’s estate, the real estate agent was not appointed until a significant time following the deceased’s passing. The deceased’s estate was not of a complex nature. Therefore, this is not a factor that the Commissioner would take into consideration when making the decision on whether or not to exercise his discretion to extend the two year period to dispose of the dwelling. During the time that U and V retained ownership of the deceased’s dwelling, it increased in value and a higher sale price was realised. Settlement on the disposal of the deceased dwelling did not occur until more than 12 years following the deceased’s passing. Having considered the relevant facts, the Commissioner will not apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit until the requested date. The capital gains tax (CGT) rules will apply to the disposal of the dwelling.