Edited version of your written advice

Authorisation Number: 1051189371412

Date of advice: 10 February 2017

Ruling

Subject: Capital gains tax

Question

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 interest in the property?

Answer

No

Question

Is the first element of the cost base of the property acquired by the deceased prior to 20 September 1986 the market value on the deceased's date of death?

Answer

Yes

Question

Do the costs incurred by the executor of a deceased estate to resolve a dispute with a person claiming an interest in an asset of the estate, form part of the cost base of the asset under subsection 110-25(5) of the ITAA 1997?

Answer

Yes

This ruling applies for the following period(s)

Financial year ending 30 June 201X

The scheme commences on

1 July 201X

Relevant facts and circumstances

Your parent bought a property prior to 20 September 1985. Prior to their death their spouse moved into the property.

Probate was granted in 201X. You and your siblings were the executors of the estate.

After your parent's death their spouse continued to live on the property and commenced proceedings against you and your siblings as executors, seeking provision from the estate.

The matter was settled and the spouse moved out, giving you vacant possession. You incurred significant legal costs in settling the claim.

For several months after the spouse moved out, the property remained vacant. After this time, you decided to rent the property out, namely to help maintain and repay loans you had in relation to the legal fees. The property was sold shortly after in the financial year ending 30 June 2016.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 118-195(1)

Income Tax Assessment Act 1997 Subsection 128-15(4)

Income Tax Assessment Act 1997 Subsection 110-25(5)

Reasons for decision

Summary

The Commissioner will not exercise his discretion and extend the 2 year time limit. The cost base of the property is the market value on your parent's date of death. The costs incurred by you to settle the dispute, including the legal fees paid in respect of the dispute, form part of the cost base of the estate's asset.

Detailed Reasoning

Two year period extension

Subsection 118-195(1) of the ITAA 1997 states that if you own a dwelling in your capacity as trustee of a deceased estate (or it passed to you as a beneficiary of an 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 before 20 September 1985, or

● the property was acquired by the deceased 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, and

● your ownership interest ends within 2 years of the deceased's death (the Commissioner has discretion to extend this period in certain circumstances).

You have an ownership interest in a property if you have a legal interest in the property. This means that if you sell a property, your ownership interest continues until the date of settlement (rather than the date the contract of sale is signed).

In this case, your parent acquired his interest in the property before 20 September 1985.

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

In this case, we accept that there was an initial delay in selling the property due to legal proceedings commenced by your parent's spouse for provision from the estate. The proceedings were settled less than two years from the date of your parent's death, however the property was not sold when you received vacant possession. The property was vacant for a number of months before being rented out for financial reasons. The delay in selling the property was not due to circumstances beyond your control.

While we appreciate your circumstances, your decision to rent the property out for financial reasons is of a different nature to the situations in which the Commissioner can exercise his discretion. Having considered the relevant circumstances, the Commissioner will not exercise his discretion and extend the 2 year time limit.

Cost base

Where a CGT asset was acquired pre-CGT, the first element of the cost base will be the market value of the asset on the date of death (subsection 128-15(4) of the ITAA 1997).

In your case, your parent acquired their interest in the property before 20 September 1985 therefore the cost base of the property is the market value on their date of death.

Legal costs

Subsection 110-25(5) of the ITAA 1997 relates to the fourth element of a cost base and includes capital expenditure you incurred to increase or preserve the asset's value.

The legal fees paid by you, as executor, were incurred to remove an impediment to the sale of the property. Your parent's spouse's claim for provision from the estate was an issue which needed to be resolved before the sale of the property could proceed.

The requirements of the fourth element of the CGT cost base are satisfied. As such, the costs incurred by you to settle the dispute, including the legal fees paid in respect of the dispute, form part of the cost base of the estate's asset under subsection 110-25(5) of the ITAA 1997.