Private ruling: Capital gains tax - deceased estate - Commissioner's discretion to extend the two year period - main residence exemption
Published: March 2014
Ruling period: To a specified date.
Date scheme commenced: 1 July 2013.

Ruling: Q1: Will the Commissioner exercise 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? | A1: Yes.

Relevant facts and circumstances: Your parent A and parent B (the deceased) acquired a property prior to 20 September 1985. The property was their main residence and has never been used to produce assessable income. The deceased passed away almost two years ago. You and your sibling are the beneficiaries of the deceased's estate. The executor of the estate is an organisation. You and your sibling were advised by the executor that the administration of the deceased's estate would take between nine to 12 months to administer. The transfer of the property into your names took place late last year. You and your sibling were not aware that the change of ownership of the property had been transferred to you until the receipt of a letter from the executor dated approximately two months after the property was transferred into your names. The length of time taken by the executor to complete the administration of the deceased's estate has resulted in you and your sibling having approximately four months to finalize the sale of the property. You and your sibling need time to prepare the property for sale and clear out your parents' personal effects. The property will not be used to produce assessable prior to its disposal. The settlement on the disposal of the property will occur prior to a specified date.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 118-130(3) | Income Tax Assessment Act 1997 section 118-195 | Income Tax Assessment Act 1997 subsection 118-195(1)

Reasons for decision: Summary: A capital gain or capital loss is 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 beneficiary of a deceased estate or you owned it as the trustee of the deceased estate. The availability of the exemption is dependent upon: • who occupied the dwelling after the date of the deceased's death, or • whether the dwelling was disposed of within two years of the date of the deceased's death. For a dwelling acquired by the deceased, 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 relevant 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 that person disposed of the dwelling in their capacity as beneficiary, or • your ownership interest ends within two years of the deceased's death. In your case, when the deceased died, an interest in the property passed to you. The property was the deceased's main residence prior to death, and at that time, was not being used to produce assessable income. However, the property 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 property 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, thus this alternative basis of exemption in the provision may apply. 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. The delay in disposing of the property was due to the complexity of the deceased estate which delayed the completion of the administration of the estate. 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 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 to a specified date.