Private ruling: Capital gains tax - deceased estate - Commissioner's discretion
Date of advice: 22 October 2015
Published: October 2015
Ruling period: Year ended 30 June 20VV.
Date scheme commenced: 1 July 20VV.

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 settlement? | A1: Yes.

Relevant facts and circumstances: The deceased acquired a dwelling (the dwelling) The deceased passed away in 20XX. The dwelling had been the deceased's main residence. Probate was granted in 20YY. The main beneficiaries of the estate are the deceased's children ('A') and ('B') The deceased's will appointed as the sole executor, the principal of a firm of Solicitors. The executor arranged for a number of local real estate agents to inspect the dwelling and provide advice in relation to the sale of the dwelling. The agents recommended that considerable work be carried out as the dwelling was in a poor state, this included fencing, painting, general maintenance and removal of asbestos and general clearing up. The executor informed 'A' and 'B' that they proposed to obtain quotations from the selected agent in relation to carrying out the work required. The beneficiaries instructed that they would undertake a considerable amount of work personally and that they would be able to engage private contractors at a lower price. The executor agreed to this request. The work at the dwelling was delayed due to 'A' being diagnosed with a medical condition which required treatment over a period of months which included surgery. 'B' has also experienced difficulties in attending to the work on the dwelling as their child has had conditions which require ongoing assistance from family members and they have experienced periods of incapacity. 'B's spouse was also diagnosed with a serious medical condition in 20ZZ as well as their employment being made redundant. These personal circumstances have contributed to the delay in the beneficiaries completing the work on the dwelling prior to sale. The works were completed and the property was listed for sale. The dwelling was sold at public auction in 20VV. The dwelling was vacant and has not been used to produce income.

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) Explanatory memorandum to the Taxation Laws Amendment Bill (No.9) of 2011 (Cth) | 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. | 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. | The delay in disposing of the dwelling was due to the serious personal circumstances of the beneficiaries of the deceased estate which delayed the completion of the administration of the estate. | 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.