Private ruling: CGT and deceased estates
Published: September 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. Issue 2 | Q3: Does the three year rule for the taxation of estates using individual income tax rates apply based on the number of financial years after death? | A3: Yes.

Relevant facts and circumstances: The deceased passed away in 200X. Under their will, the deceased left a sum of money to (A) with the residue of their estate to be split between their family members. (A) launched a challenge to the Estate under the belief they were the deceased's de facto spouse and therefore entitled to a greater share of the estate. Settlement was eventually reached between the Estate and (A) whereby they agreed to accept a sum of money as their full entitlement, meet their own costs and agree to be removed as an executor of the will. The deceased's main residence was sold with settlement taking place in the 20XX financial year, having the executor issue being resolved. The deceased acquired the property post-CGT and it was never used to produce assessable income. The residence was not rented between the date of death and sale. The sole reason the residence was not sold upon the deceased's passing was due to the refusal of one of the executors to sign paperwork which would have facilitated the sale of the property within two years. The property was listed for sale and sold in the same income year in which the issue with the Executor was finalised. The 2014 return will be the first and only return lodged by the Estate. The beneficiaries were not presently entitled in the 2014 financial year. The Estate only had two sources of income, that from the sale of the main residence and the payout of superannuation benefits. The superannuation company decided not to pay out the deceased's superannuation entitlement until settlement was reached between the Estate and (A). The superannuation company paid out the deceased's benefits to the Estate when a settlement was reached.

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

Reasons for decision: Detailed Reasoning - Issue 1: As per subsection 118-195(1) of the ITAA 1997, 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 dispose 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 beneficiary held it. In this case, the delay caused by the will being challenged was outside of your control. This prevented you from disposing of the property within the two year time limit. The property was never used to produce assessable income and was held for over four years. This time was as short as practical given the circumstances, where it took longer than two years for the matter to be settled between the Estate and (A) before the disposal of the property was able to be arranged. Accordingly, 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 in accordance with your request. As a result, you satisfy all the conditions contained in section 118-195 of the ITAA 1997 and can disregard any capital gains or loss that arises as a result of the disposal of the property. | Detailed Reasoning - Issue 2: Where no beneficiary is presently entitled to income received by the deceased estate, the trustee is liable to pay tax on that income. For the remainder of the financial year after the date of death and for the next two financial years, deceased estate income is taxed at the general individual rates, with the benefit of the full tax free threshold (Taxation Determination TD 92/192). The concessional three year period cannot be extended. For the fourth financial year and later years, special progressive trust tax rates will apply. In your case, the deceased passed away in the 200X financial year and the Estate's first tax return will be for the 20XX financial year, which is beyond the concessional three year period. At this time, the beneficiaries of the estate were not presently entitled. Accordingly, the special progressive tax rates will apply for the Estate's 2014 return.