Edited version of your written advice

Authorisation Number: 1012882772254

Date of advice: 24 September 2015

Ruling

Subject: Capital gains tax - deceased estate - Commissioner's discretion

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 to dispose of your ownership interest in the dwelling?

Answer:

No.

Question 2:

Will the capital gain made on the disposal of your ownership interest in the dwelling be reduced under section 118-200 of the ITAA 1997?

Answer:

No.

This ruling applies for the following period:

Income year ending 30 June 2014.

The scheme commences on:

1 July 2013.

Relevant facts and circumstances

Your relatives (Person A and Person B) purchased the property (the dwelling) before 20 September 1985.

Person A and Person B resided in the dwelling with their child, Person C, who had been diagnosed with a medical condition.

Person B passed away a number of years later, with Person A passing away around two years later.

In accordance with Person A's will, your relative (Person D) inherited the dwelling.

Person C continued to reside in the dwelling after Person A had passed away.

Despite limited physical contact, it had been Person D's attitude that it was their duty to look after Person C and that the dwelling was their home for as long as they wished. This sense of duty was impressed on you and your siblings.

Person D made a will prior to 20 September 1985 (the 1st Will) which provided Person C with a life interest in the dwelling.

Person D was very concerned about ensuring that Person C could remain in the dwelling and was worried about asset protection matters for their children which would put the dwelling at risk. Person D feared what would happen to the dwelling should Person C outlive Person D's spouse, which was likely given their spouse's age

Person D made a new will a number of years later (the 2^nd Will) which made provisions for Person C to have a life interest in the dwelling, or at the trustee's discretion for the dwelling to be disposed of and the proceeds to be used for Person C's maintenance, accommodation and welfare.

In the same month as the 2^nd Will was made, Person D underwent medical treatment. Person D had been very anxious about Person C's welfare, and one of their children's financial and matrimonial difficulties and potential litigation matters that could affect the dwelling

In the following month, Person D made a new will (the 3rd Will) in which they bequeathed the dwelling, together with furniture, furnishings and household effects, to you and a relative (Person E) in equal parts. This third will did not give Person C any right to reside in the dwelling.

Around three months later, Person D (the deceased) passed away.

In accordance with the deceased's will, your siblings were named as the Trustees of the deceased's estate (Trustee A and Trustee B).

Trustee A, as the primary Trustee for the deceased's estate, lodged an application for the transfer of the title of the dwelling into the names of the trustees in the month after the deceased had passed away, using the 3rd Will, being the last will of the deceased. Trustee A knew that the 3rd Will did not provide Person C with a right to occupy the dwelling.

Person C continued to reside in the dwelling for many years after the deceased passed away until they had no longer been able to reside in the dwelling. Person C lived a reclusive life style, had a tendency to hoard and would not allow any of their family members to enter the dwelling.

It was never communicated to Person C during the deceased's lifetime that the deceased had held the title of the dwelling until they passed away. The family believed that it was Person C's understanding that the dwelling was theirs. As such, no one had entered the dwelling for many decades, except for a brief period of time to clean up after floods.

More than a decade after the deceased had passed away, Person C became ill and was hospitalised at the beginning of the year. At that time it became clear to the family that Person C could not return to the dwelling, and Trustee A had lodged a Transmission by Death Application around half way through the year to transfer the title of the dwelling into you and Person E's names to enable the dwelling to be sold, and the funds applied for Person C's future care need in accordance with the 2nd Will. The dwelling had remained in the estate's name until Person C had been hospitalised as the family had thought of the dwelling as Person C's house and not the beneficiaries' house

Person C has passed away a number of months after they had been hospitalised.

On receipt of the Transmission of Death documentation, Trustee B had communicated to Trustee A via a letter sent through their solicitors, Trustee B's understanding of the deceased's wishes just before they had passed away, which was in accordance with the 2nd Will. The letter also refers to discussions Trustee had with their siblings which supports the view that Person C had the right to reside in the dwelling until their death, or until the event that they no longer could reside in the dwelling

You state that there had been some uncertainty in regard to the 3rd Will and the provisions for Person C. The family's understanding and behaviour was always on the basis that Person C had a right to reside in the dwelling under a life tenancy arrangement in accordance with the 2^nd Will. Accordingly, the title of the dwelling was not transferred into you and Person E's names until after Person C had passed away

The family had been unable to inspect the dwelling during Person C's hospitalisation and had commenced preparing the dwelling for sale after Person C had passed away. The state of the dwelling had been poor and was full of Person C's personal items acquired from their hoarding tendencies.

For a period of around twelve months after Person C had passed away, activities were undertaken to prepare the dwelling for sale.

Around five months after Person C had passed away, a valuer had been approached to determine if the dwelling should be demolished and the vacant block sold, or if the dwelling should be sold in the state it was. You decided to make the necessary repairs to enable the dwelling to be listed on the market. Due to the state of the dwelling, the time it took to examine and deal with Person C's belongings and the capacity of the family to attend to the matter, it had taken around ten months for the repairs to be completed. The family then approached a real estate agent to discuss the selling of the dwelling.

About fifteen months after Person C had passed away, a real estate agent was approached to discuss selling the dwelling.

The suburb where the dwelling is located experienced flooding about sixteen months after Person C had passed away. While the dwelling had not been directly affected, properties surrounding the dwelling were damaged and the property values in the suburb declined. Advice had been sought from real estate agents who advised not to list the dwelling for a number of months.

You and Person E were unable to sell the dwelling due to a lack of demand from the time of the floods.

The dwelling was sold over fifty months after Person C had passed away.

You have provided copies of a number of documents, which should be read in conjunction with and forms part of the scheme of this private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

Reasons for decision

Commissioner's discretion under section 118-195 of the ITAA 1997

Subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides a capital gains tax (CGT) exemption under which the capital gain or capital loss made from a CGT event that happens to a dwelling, or you ownership interest in it to be disregarded if:

• 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

• at least one of the items in column two and at least one of the items in column three of the table below are satisfied:

However, the Commissioner has the power under section 118-195 of the ITAA 1997 to extend the two year period to dispose of an inherited dwelling in relation to CGT events that happened in the 2008/09 year and later income years in accordance with the explanatory memorandum (EM) to the Bill that added the discretion to section 118-195 of the ITAA 1997, (the Tax Laws Amendment (2011 Measures No 9) Bill 2011). This enables a trustee or beneficiary of a deceased estate to apply to the Commissioner to grant an extension of the two year time period to dispose of the deceased's dwelling, where the CGT event happens in the 2008-09 income year or later income years.

The Commissioner would be expected to exercise 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.

In exercising the discretion the Commissioner will also take into account whether and to what extent the dwelling is used to produce assessable income and for how long the trustee or beneficiary held the ownership interest in the dwelling. 

Where a trustee or beneficiary of a deceased estate cannot access a CGT exemption under section 118-195 of the ITAA 1997, section 118-200 of the ITAA 1997 may provide a partial exemption.

Application of the Commissioner's discretion to your situation

You have made the following statements in the private ruling application to support your request that the Commissioner should exercise his discretion to extend the two year period to dispose of your ownership interest in the inherited dwelling:

• The dwelling was not sold before the two year period passed because it was understood that Person C had a right of occupancy. It would have meant Person C would have had to vacate their home, which would have been difficult and disruptive to find suitable alternative housing for them

• The trustees of the estate, and the beneficiaries were unable to administer the estate during the two year period after the deceased passed away due to the unique situation where the resident of the dwelling would suffer severely should the dwelling be sold due to their mental condition. To sell the dwelling would have meant going against the wishes of the deceased and would have been very disruptive with harsh consequences to their relative

• The property would have been sold shortly after Person C had passed away but for the state of the dwelling, the time it took the family to clear out Person C's belongings, and to attend to the necessary repairs to enable the property to be suitable for sale. The floods had also caused further delays making properties in the suburb the dwelling was located difficult to sell; and

• It would have been impossible to sell the dwelling within the two years after the deceased passed away given the situation, the enormity of the task in preparing the dwelling for sale, and the floods.

The Commissioner has considered the following factors when determining whether it would be appropriate to exercise the discretion:

• The deceased had made provisions in their 1^st and 2^nd Wills for Person C to have a life interest in the dwelling after they had passed away

• The family's understanding and actions in relation to the dwelling after the deceased passed away was that Person C had a right to reside in the dwelling under a life tenancy arrangement in accordance with the deceased's 1^st and 2^nd Wills

• The Trustees expected Person C to have difficulties coping if they were moved out of the house shortly after the deceased passed away

• The family had acted in accordance with the deceased's two earlier wills and had allowed Person C to continue to reside in the dwelling until they were no longer able to reside there due to their health issues

• The transfer of the title of the dwelling from the deceased's name into the deceased estate was lodged by a Trustee of the deceased's estate in the month after the deceased passed away, and the title was transferred into you and Person E's names over a decade after the deceased had passed away

• The Commissioner expects the trustees of a deceased estate to make reasonable enquiries about matters that affect the administration of the estate

• While the family's understanding and actions had been under the assumption that Person C had a right to occupy the dwelling, Trustee A had knowledge of what was in the 3^rd Will, and that Person C did not have a right to occupy the dwelling

• The trustees of a deceased estate have a duty to distribute the estate of the deceased estate subject to the administration as soon as possible. However, the title of the dwelling had not been transferred into you and Person E's names until many years after the deceased had passed away

• Trustees have a fiduciary obligation placed on them under the deceased's will. That obligation is separate to taxation consequences and trustees need to factor this into making their decisions. The Commissioner expects the trustees of a deceased estate to act responsibly in relation to the taxation affairs of the deceased and of the estate

• The trustees should have been aware that the CGT provisions might apply if the sale of the property was delayed beyond two years from the date the deceased passed away

• It is reasonable to expect that the trustees of a deceased estate would be aware of the deceased's last will and testament, which would be the will submitted when the trustees were applying for probate, and what bequests the deceased had made in the will to ensure that they comply with the deceased's wishes

• The deceased's last and final will did not make any provisions for Person C to have a life interest in the dwelling, or that they were entitled to any part of the deceased's estate

• One of the Trustees did not know the true contents of the 3rd Will

• The deceased's estate was not of a complex nature. Therefore, this is not a factor that the Commissioner would take into consideration when making the decision on whether or not to exercise his discretion to extend the two year period to dispose of the property; and

• Settlement on the disposal of the dwelling did not occur until many years after the title of the dwelling was transferred into you and Person E's names, along time after the deceased passed away.

Conclusion

Based on the information and documentation provided it has been determined that the Commissioner's discretion will not be exercised to extend the two year period in this situation as it is viewed that the facts of this situation are not of a nature that would be acceptable for the exercising of the Commissioner's discretion.

You have not identified any uncertainty in the interpretation of the deceased's last will, being the 3rd Will. In the 3^rd Will, the deceased had clearly not left any bequests to Person C. If there had been any uncertainty about the 3rd Will, the Trustees should have made enquiries in relation to the will to ensure that the deceased's estate was administered appropriately, and that any issues which may affect the administration of the estate could be addressed. Any uncertainty of the will may have promoted the challenging of the deceased's last will, which did not occur in this case.

While we acknowledge and appreciate the circumstances in relation to Person C's medical issues and actions in relation in them, it was ultimately the decision of you, the other beneficiary, and the Trustees of the deceased's estate as a family to allow Person C to continue to reside in the dwelling, not inform them of the true legal situation and not sell the dwelling within the two year period after the deceased passed away. An individual only has a right to occupy a dwelling under the deceased's will for the period specified in the will. An exemption is not available for any part of the trustee's or beneficiary's ownership period that a person who does not have a right of occupancy occupies the dwelling.

While the deceased had made provisions for Person C to have a life interest in the dwelling in the two earlier wills, the deceased's final will did not leave any such right. Therefore, the right to reside in the dwelling was not a right provided in the deceased's last will and it cannot be viewed the Person C had a right to reside in the dwelling. The right had been granted by the family of the deceased and not by the deceased.

You have not shown that the distribution of the estate to you and Person E was delayed due to any legal impediment. The delay in the administration of the deceased's estate appears to have been as a result of the actions and choices of the Trustees of the deceased's estate, and the family of the deceased.

After taking into consideration the facts of your situation, the Commissioner has determined that he will not exercise his discretion to extend the two year period to dispose of your ownership interest in the dwelling.

Partial exemption for deceased estate dwellings

Section 118-200 of the ITAA 1997 provides for a partial exemption (or no exemption) if an ownership interest in a dwelling passed to you as a beneficiary of a deceased estate, or you owned it as the trustee of a deceased estate, and you are not entitled to the full exemption under section 118-095 of the ITAA 1997.

The capital gain or capital loss for the partial exemption is calculated using the following formula:

CG or CL amount X Non-main residence days

Total days of ownership

Non-main residence days is the sum of the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of an individual referred to in item 2, column 3 of the above table.

Application of the partial exemption provisions to your situation

The following statements were provided in the private ruling to support that you are entitled to a partial exemption:

• The partial exemption would apply if an individual had the right to occupy the dwelling under the deceased's will

• At all times the parties acted on the basis that Person C had a right to occupy the dwelling under a life tenancy arrangement consistent with the deceased's 2nd Will

• There was uncertainty as to the 3rd Will

• The dwelling had been Person C main residence for their entire life

• The title of the dwelling did not pass to you and Person E until after Person C was hospitalised and deemed unfit to return to the dwelling. The Trustees and the beneficiaries had acted in accordance with the 2nd Will where that property was to be sold to fund Person C future care requirements; and

• If the Commissioner won't exercise his discretion to allow a full exemption under section 118-195 of the ITAA 1997, it is submitted that a partial exemption applies in relation to the period after the deceased passed away given that Person C had lived in the dwelling as a life tenant.

As section 118-195 of the ITAA 1997 does not apply to your situation, we have considered whether you may be entitled to a partial exemption of the capital gain made on the disposal of the property under section 118-200 of the ITAA 1997.

When applying section 118-200 to your situation, we need to determine the number of main residence days in your ownership period of the dwelling for a person as outlined in item 2, column 3 of the table above as follows:

• the spouse of the deceased immediately before the death

In this case, the spouse of the deceased did not reside in the dwelling just before the deceased passed away, and it was therefore not their main residence just prior to the deceased passing away. Therefore, this condition has not been met

• an individual who had a right to occupy the dwelling under the deceased's will

The deceased's last will, being the 3rd Will, does not provide for anyone to have a life interest in the dwelling. Therefore, Person C did not have a right to reside in the dwelling, but had been allowed to continue residing in the dwelling by the family.

Accordingly, as no individual had a right to occupy the dwelling under the deceased's last will, this condition has not been met; and

• if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary, that individual

While the disposal of the dwelling was made by you as a beneficiary, the dwelling had not been your main residence from the date the deceased passed away until you ownership interest in the dwelling ended. Therefore, this condition has not been met.

Conclusion

Based on the information and documentation provided, we view that there were no main residence days during your ownership period of the dwelling. Therefore, the non-main residence days in your ownership period will be the same as the days in your total ownership period.

Accordingly, when calculating the capital gain made on the disposal of your ownership interest in the dwelling under section 118-200 of the ITAA 1997, any capital gain made on the disposal of your interest in the dwelling will not be reduced because your non-main residence days and your total days in your ownership period are the same.

Note: If you meet the conditions for the 50% CGT discount, you will be able to apply it to the capital gain made on the disposal of your ownership interest in the dwelling.