Private ruling: Capital gains tax – deceased estate – 2 year discretion
Date of advice: 19 November 2015
Published: May 2016
Ruling period: Year ended 30 June 2015.
Date scheme commenced: 1 July 2014.

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 until 14 April 2015? | A1: Yes.


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 Explanatory memorandum to the Taxation Laws Amendment Bill (No.9) of 2011 (Cth)

Reasons for decision: Summary: A capital gain or capital loss may be 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 and a beneficiary of a deceased estate or you owned it as the trustee of the deceased estate. For a dwelling acquired by the deceased prior to 20 September 1985, 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 individuals: - the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased) - an individual who had a right to occupy the dwelling under the deceased's will, or - an individual beneficiary to whom the ownership interest passed and the CGT event was brought about by that person, or ● your ownership interest ends within two years of the deceased's death. For a dwelling acquired by the deceased on or after 20 September 1985, the dwelling must have been used as the deceased’s main residence just before their death and not used to produce assessable income at that time. In your case, when the deceased died, the dwelling passed to you. The dwelling was the deceased’s main residence prior to death, and at that time, was not being used to produce assessable income. However, the dwelling 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 dwelling sale settled 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. 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 dwelling was due to the delay of the executors in administering the estate. The delay caused by the inactivity of the named executors compelled a beneficiary to apply for letters of administration with the will annexed. The delay prevented you from disposing of the dwelling 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 will apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit until settlement in the 2014-15 income year.

The deceased acquired a dwelling (the dwelling) | The deceased passed away in 2011. | The executor’s named in the deceased’s will, ‘A’ and ‘B’, did not obtain probate and failed to progress the administration of the estate. | The executor’s were represented by X Lawyers (‘X’) | ‘C’ child of the deceased and beneficiary of the estate requested the executors attend to the administration of the estate without success. | The executors were placing undue pressure on ‘C’ and requested that they should formally relinquish their rights to a share in the estate. | The executor’s had prepared a document and asked ‘C’ to sign and agree to relinquish their rights. | ‘A’ engaged the services of a solicitor, (‘Y’) who agreed to work for free, who advised that ‘C’ should not sign the document. | ‘C’ was present in ‘Y’ office when requests were made to X for documents in relation to the estate. | ‘C’ did not have the funds to commence Supreme Court legal proceedings to have the executors removed. | The executor’s renounced their roles in 2013. | An organisation was requested in 2013 to take over the administration of the estate; this organisation decided that they did not want to undertake this role after a period of time. | ‘Y’ again requested in 2014 relevant estate documents from ‘X’, noting that the executor’s had renounced their role. | ‘C’ engaged another legal representative, ‘Z’, who requested the estate documents in 2014. | A copy of the will was provided after a period of time. | The original will was enclosed in letter after a period of time. | Letters of administration were granted to ‘C’ as administrator after a period of time. | The delays in administering the estate were due in part to the inactivity of the executor’s.