Private ruling: Deceased estate
Date of advice: 30 October 2017
Published: March 2018
Ruling period: Year ended 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2016

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 | Q2: Did the beneficiaries of the deceased estate acquire the main residence portion of the property at market value on the deceased’s date of death? | A2: Yes | Q3: Did the beneficiaries of the deceased estate acquire the deceased’s pre-CGT interest in the non-main residence portion of the property at market value on the deceased’s date of death? | A3: Yes | Q4: Did the beneficiaries of the deceased estate acquire the deceased’s post - CGT interest in the non - main residence portion of the property at market value on the deceased’s date of death? | A4: No

Relevant facts and circumstances: X and Y acquired a property prior to September 1985. It was their main residence. The property is greater than 2 hectares. Y passed away in 199X. X inherited Y portion of the property as surviving joint tenant. In 201X, child 1 moved into the property with their family. It was their main residence. In 201X, child 2 also moved into the property, making it their main residence. X passed away in 201X. The property was transferred to child 1 as the executor of the deceased estate within a few months of the deceased’s death. More than 2 years later, the property was transferred into the names of the three beneficiaries, as per the deceased’s will. The property is going to be listed for sale within the next 12 months.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 118-195(1), | Income Tax Assessment Act 1997 Section 118-255, | Income Tax Assessment Act 1997 Section 128-15, and | Income Tax Assessment Act 1997 Section 128-50.

Reasons for decision: Summary: Subsection 118-195(1) of the ITAA 1997 states that if you are an individual who owns a dwelling in a capacity as trustee of a deceased estate, then you are exempt from tax on any capital gain made on the disposal of the property if: ● The property was acquired by the deceased on or after 20 September 1985 and the property 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; or the property was acquired by the deceased before 20 September 1985; and ● your ownership interest ends within two years of the deceased’s death (the Commissioner has discretion to extend this period in certain circumstances). The Commissioner can exercise his discretion in situations such as where: ● 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 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 dwelling. In this case, the property will be disposed of outside the two year time frame, and you have not provided a valid reason for the delay in disposing of the property. The Commissioner is therefore unable to apply his discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the two year time limit. Accordingly, the capital gain made on the disposal of the property will not be able to be disregarded entirely. Y’s interest passing to X When a person dies, their assets devolve (are transferred) to their legal personal representative (LPR) or are acquired by a surviving joint tenant, where the deceased owned those assets as joint tenant with another person. In effect, there is a change of ownership of the assets and, therefore, a CGT event (being a disposal) happens. However, any capital gain or capital loss from this CGT event is disregarded, as is any capital gain or loss that: ● the LPR makes when the asset passes to a beneficiary in the estate, or ● that is made as a result of the asset being acquired by a surviving joint tenant. Subsection 128-50(2) of the ITAA 1997 explains that when a CGT asset is owned by joint tenants and one of them dies, the surviving joint tenant is taken to have acquired the deceased individual's interest in the asset on the day the individual died. Section 128-50(4) of the ITAA 1997 explains modifications to the cost base of CGT assets for surviving joint tenants. It provides that if the deceased acquired their share in the asset before 20 September 1985, the first element of your cost base and reduced cost base of that interest, is taken to be the market value of the deceased’s share. In this case, when Y passed away, X acquired their interest in the property at market value. Therefore, at this point in time, X now has two interests in the property; 50% acquired pre-CGT, and 50% acquired post-CGT. Main residence exemption Section 118-255 of the ITAA 1997 defines the maximum exempt area for a main residence as two hectares. In this case, the property is greater than 2 hectares, therefore the main residence exemption can only apply to two hectares of it. X interests passing to the beneficiaries Subsection 128-15(4) of the ITAA 1997 provides a table which sets out the modifications to the first element of the cost base, or reduced cost base, of the CGT asset in the hands of a beneficiary of a deceased estate. Item 1 of the table includes that where a CGT asset the deceased acquired on or after 20 September 1985, the first element of your cost base, or reduced cost base, of that interest will be the deceased’s cost base of the asset on the day they died. Item 3 of the table includes that where a dwelling that was the deceased’s main residence just before they died, and was not then being used for the purpose of producing assessable income, the first element of your cost base, or reduced cost base of that interest will be the market value of the dwelling on the deceased’s date of death. Item 4 of the table includes that where a CGT asset the deceased acquired before 20 September 1985, the first element of your cost base, or reduced cost base, of that interest will be the market value of the dwelling on the deceased’s date of death. Accordingly, you will each have three different interests in the property. Pre-CGT interest 50% of your interest in the property will be the pre-CGT interest. You are taken to have acquired this interest at the market value on the deceased’s date of death (Item 4 of subsection 128-15(4)). Post- CGT interest (main residence and non-main residence) The remaining 50% of your interest will be the post-CGT interest. This interest will then be broken down further to take into account the 2 hectare limit on the main residence exemption. You are taken to have acquired the main residence portion of the post-CGT interest at the market value on the deceased’s date of death (Item 3 of subsection 128-15(4)). For the non-main residence portion of the post-CGT interest, you have acquired the deceased’s cost base on their date of death (Item 1 of subsection 128-15(4)).

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