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Edited version of your written advice
Authorisation Number: 1012812891111
Ruling
Subject: Capital gains tax - deceased estate and extension of two year period
Question 1
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?
Answer 1
Yes.
Question 2
Is the capital gain that you will make as a result of the sale of the properties disregarded?
Answer 2
Yes.
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
The deceased inherited a property (property 1) when their spouse passed away some time prior to 20 September 1985. This property was the deceased and their spouse's main residence.
When their spouse passed away they also inherited an adjoining property (property 2). This property is a duplex which has always been rented.
The deceased lived at property 1 until they passed away a number of years ago.
Two wills of the deceased were identified. One was dated sometime in the 1980's (1980s will) and the other was dated sometime in the 2000's (2000s will).
The deceased had a number of relatives who were the principle beneficiaries under both wills.
Two of the beneficiaries were named as executors (executor 1 and executor 2) in both wills.
The properties (property 1 and property 2) are the principle assets of the residuary estate.
The most significant difference between the 1980s will and the 2000s will was that the 1980s will provided that property 1 was to be held on trust to permit executor 2 the use, occupancy and enjoyment of it during their lifetime.
Executor 2 disputed the validity of the execution of the 2000s will and instructed solicitors to act on their behalf in proving the 1980s will.
Executor 1 investigated the execution of the 2000s will and confirmed that it had been properly executed.
Executor 1 instructed solicitors to negotiate with executor 2 and their solicitors in an attempt to enable a joint application for probate of the 2000s will.
Executor 2 instructed their solicitors to assert that probate should be granted for the 1980s will.
Sometime later, caveats were lodged by both executor 1 and executor 2 preventing each other from applying for probate in respect of the two wills.
Sometime later, during a mediation conference, agreement was reached that:
1. Executor 2 renounced the right to act as executor,
2. Executor 1 to proceed with application for probate of the 2000s will,
3. Distribution of the estate under the 2000s will be varied by providing for:
a. a gift of a specified amount to executor 2 (payable from the proceeds of sale of property); and
b. Executor 2 permitted to continue to reside in property 1 until 14 days after any contract for sale of the property becomes unconditional.
Shortly afterwards executor 2 sacked their solicitors and argued that they did not agree to the mediated settlement.
Sometime later probate was granted to executor 1 for the 2000s will.
Shortly afterwards an application was lodged to transfer property 1 and property 2 to executor 1 as the executor of the estate.
Some week's later executor 2 requested the Courts to require formal passing of accounts by executor 1, challenging the expenses incurred.
After further legal challenges the Court issued a certificate passing the accounts.
Both property 1 and property 2 were listed for sale.
Sometime later an offer was presented however the buyer insisted on conditions that were unsuitable and no contract was entered into.
Planning and zoning issues with the properties have further complicated the sale.
An offer to purchase both property 1 and property 2 was received and accepted by executor 1. A capital gain will be made as a result of the sale.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 118-195.
Reasons for decision
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.
Beneficiary or trustee of deceased estate acquiring interest | |||
Item |
One of these items is satisfied |
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 |
Where a dwelling is disposed of outside the two year period, you will only be able to disregard the capital gain from the sale of the property if the Commissioner exercises his discretion to allow a longer 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 (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.
Application to your situation
Both property 1 and property 2 were acquired by the deceased prior to 20 September 1985 (pre-CGT) and satisfy the requirements for the exemption under section 118-195 of the ITAA 1997. Although property 2 was not the main residence of the deceased and was used for income producing purposes, as it was acquired pre-CGT the use of the property is not relevant when considering the exemption.
The properties were sold outside of the two year period due to the fact that the administration of the estate was delayed as a result of legal action that occurred between the two executors. This legal action took considerable time to resolve.
Furthermore, there have also been issues with the zoning of the properties that have further contributed to the delay in sale.
Having considered the relevant facts, 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 period.
As a result, you will satisfy all of the conditions contained in section 118-195 of the ITAA 1997. Accordingly, you can disregard any capital gain or loss that arises as a result of the disposal of the property.