Private ruling: Deceased estate - CGT main residence exemption
Published: October 2014
Ruling period: Year ending 30 September 2015
Date scheme commenced: The scheme has commenced

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 to the date you requested? | A1: Yes. | Q2: Can you disregard any capital gain or loss that arises from the disposal of the property under section 118-195 of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: The deceased purchased the property before 20 September 1985, which they treated as their main residence. The property was not used to produce assessable income during the deceased's lifetime. After the deceased died, the property has been rented out for a period of time. The delay in the sale of the property has been caused by a dispute on whether or not a loan, which was taken out on the property, should have been approved. The Financial Ombudsman has been looking into the matter for over a year, and will take at least another two months to get a determination. You have gone to Court to retrieve the value of the loan against the Estate, as the recipient of the full loan monies has not refinanced their house to repay the debt. You sold the property on within the two year time limit however it is not likely to settle until after the two years has passed, due to the dispute.

Relevant legislative provisions: Income Tax Assessment Act 1997 (ITAA 1997) section 118-195

Reasons for decision: Summary: As per subsection 118-195(1) of the Income Tax Assessment Act 1997 (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. | Detailed Reasoning - 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 In this case, when the deceased died the property passed to the legal personal representative. The property was not used to produce assessable income during their lifetime, and it was their main residence just before their death. The property has been used to produce assessable income after the deceased passed away, while the property was yet to be sold. You will only be able to disregard the capital gain from the sale of the property if the Commissioner extends the time period in which you can choose to dispose of the property. 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 the beneficiary held it. In this case, the delay caused by the pending determination from the Financial Ombudsman because of the disputed loan on the property is outside of your control. Accordingly, 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 time limit. As a result of extending the two year time limit, you will satisfy all of the conditions contained in section 118-195 of the ITAA. Accordingly, you can disregard any capital gain or loss that arises as a result of the disposal of the property.