Private ruling: Capital gains tax - deceased estate - Commissioner's discretion - two year period
Date of advice: 22 March 2016
Published: May 2016
Ruling period: Year ended 30 June 2016. | Year ended 30 June 2017.
Date scheme commenced: 1 July 20XX.

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 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 Explanatory memorandum to the Taxation Laws Amendment Bill (No.9) of 2011 (Cth)

Reasons for decision: Summary: 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. For a dwelling acquired by the deceased on or after 20 September 1985, the dwelling must have been used as the deceased's main residence just before their death and not used to produce assessable income at that time. 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. In your case, the delay in disposing of the dwelling was caused by settlement of a contract of sale over the dwelling unexpectedly falling through for reasons outside the beneficiary or trustee's control and these delays prevented you from disposing of the dwelling within the two year time limit. 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. Note: Land adjacent to a dwelling may also qualify for the main residence exemption if it and the dwelling are sold together and both of the following apply: • during the period you owned it, you used the land mainly for private and domestic purposes in association with the dwelling, and • the total area of the adjacent land and the land on which the dwelling stands is not more than two hectares (4.94 acres). If the adjacent land is used for private purposes and is greater than two hectares, you can choose which two hectares are exempt. The remainder is subject to the Capital Gains Tax (CGT) legislation.

The deceased acquired a dwelling (the dwelling) | The deceased passed away in 20XX (the deceased) | The dwelling is situated on a parcel of land greater than 2 hectares in size. | A contract for the sale was entered into in 20XX. | The purchaser requested a delay to the settlement date until a month later. | The purchaser agreed to pay a sum as compensation for the delay. | The purchaser ultimately did not settle and the contract was terminated a short time later. | Contracts were exchanged with a new purchaser in relation to the dwelling after a period of time. | The purchasers requested a settlement for a number of months, with settlement to occur in 20XX.