Private ruling: Capital gains tax
Date of advice: 4 March 2016
Published: April 2016
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the main residence exemption apply so that all or part of the capital gain made on the sale of the property is disregarded? | A1: No. | Q2: Will the Commissioner exercise the discretion provided under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the two-year main residence exemption period? | A2: No.

Relevant facts and circumstances: The deceased and their spouse purchased property before September 1985 and lived in it as their main residence. They subsequently had a number of children. The deceased and their spouse later separated and the deceased was registered as the sole proprietor of the dwelling prior to September 1985. The deceased continued to live in the dwelling as their main residence. The deceased passed away after September 1985. Immediately prior to their death, the dwelling was their main residence. The children continued to live in the dwelling after the deceased's death, as their main residence. You advise the under the directions of the deceased's will, the trustee of the deceased's estate held the estate's assets on trust until each of the children attained the age of 25. You advise that this meant that you had to wait until the youngest child attained 25 years of age before the dwelling could be sold and the estate start to be wound up. Some of the children of the deceased still lived in the dwelling as their main residence until it was later sold.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 102-20, | Income Tax Assessment Act 1997 - Section 118-195, | Income Tax Assessment Act 1997 - Subsection 118-195(1),

Reasons for decision: Summary: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a CGT event occurring. The most common CGT event, A1, occurs when you dispose of a CGT asset. The time of the event is when you enter into the contract for the disposal or if there is no contract when a change of ownership occurs. Section 118-195 of the Income Tax Assessment Act (ITAA 1997) allows the trustee of a deceased estate to disregard any capital gain or capital loss made from a CGT event that happens in relation to a dwelling that a deceased person acquired before 20 September 1985 if: (1) the trustee's ownership interest ends within 2 years of the deceased's death, or (2) from the deceased's death until the trustee's ownership interest ends, the dwelling was the main residence of one or more of the following persons: (a) the spouse of the deceased immediately before death; or (b) an individual who had the right to occupy the dwelling under the deceased's will; or (c) an individual who brought about a CGT event where the ownership interest in the dwelling passed to the same individual as a beneficiary. In your case, item (1) does not apply as your ownership interest did not end within two years of the deceased's passing. Item (2)(a) does not apply in this case. Item (2)(c) also does not apply because the property was sold in your capacity as trustee. You advise that the sale of the property should be exempt from CGT under item (2)(b) because the dwelling was the main residence of two of the deceased's children since the deceased's death until the dwelling was sold. In this case, because there is no explicit right for the children of the deceased to occupy the property under the will, item (2)(b) does not apply. Therefore, section 118-195 does not apply to disregard the capital gain for CGT purposes. 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 if 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, the property was acquired by the deceased before 20 September 1985. The property was not sold within 2 years of the deceased's date of death. As a result, you will only be able to disregard the capital gain from the sale of the property if the Commissioner extends the 2 year time period. 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 | Detailed Reasoning - Application to your circumstances: In this case, you advise that the property was not able to be sold until the youngest of the deceased's children attained the age of 25 due to a clause in the deceased's will. While we appreciate your circumstances, the circumstances are of a different nature to the situations in which the Commissioner can exercise his discretion because the will does not provide an explicit right for the children to occupy the dwelling over that period. Having considered the relevant circumstances, the Commissioner cannot exercise his discretion to extend the 2 year time limit.