Private ruling: CGT - Deceased estate dwellings - exemption - 2 year extension
Date of advice: 9 December 2016
Published: May 2017
Ruling period: Year ended 30 June 201X | Year ended 30 June 201X
Date scheme commenced: 1 July 201X

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the two year time limit to XX/XX/XXXX to disregard the capital gain or loss made on disposal of Property One? | A1: Yes. | Q2: Is an exemption allowable under subsection 118-195(1) of the ITAA 1997 with respect to the disposal of Property Two? | A2: No. | Q3: Will the Commissioner exercise his discretion under section 118-200 of the ITAA 1997 to extend the two year time limit to XX/XX/XXXX to allow a partial exemption for the capital gain or loss made on disposal of Property Two? | A3: Yes. | Q4: Are the Executors of the Estate entitled to use the submitted methodology to determine the exempt portion of the capital gain arising from the disposal of Property Two? | A4: Not applicable as the question has been withdrawn.

Relevant facts and circumstances: The deceased owned Property One and Property Two. Property One Property One was acquired by the deceased prior to 1985. Property One was the deceased's main residence until XX/XX/XXXX when the deceased moved into Property Two. Property One was rented after the deceased moved out. Property Two The deceased acquired Property Two after 20 September 1985. The deceased used part of the property for income producing purposes up until the date they passed away. These income earning activities involved other persons residing at the property. From when they moved in to when they passed away, the deceased resided in an area of Property Two. The deceased was not limited to this area as the deceased would use the entire house such as the kitchen and sitting room to talk to the other residents. The deceased maintained the gardens located at the property. The gardens at the property were available for the other residents to access and use. Property Two was also used to accommodate the deceased's relatives whenever they came to visit. Property Two is situated on land less than 2 hectares. Proceedings seeking to challenge the Will of the deceased were filed by relatives of the deceased. On XX/XX/XXXX the court proceedings were finalised. Soon after the court issued the final orders properties One and Two were placed on the market and sold by the Executors. A contract of sale was entered into on XX/XX/XXXX for properties One and Two. The date of settlement for the sale of properties One and Two was XX/XX/XXXX.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 108-5(1) | Income Tax Assessment Act 1997 subsection 108-5(2) | Income Tax Assessment Act 1997 section 118-110 | Income Tax Assessment Act 1997 section 118-115 | Income Tax Assessment Act 1997 s ection 118-120 | Income Tax Assessment Act 1997 section 118-125 | Income Tax Assessment Act 1997 section 118-130 | Income Tax Assessment Act 1997 subsection 118-190(1) | Income Tax Assessment Act 1997 section 118-195 | Income Tax Assessment Act 1997 subsection 118-195(1) | Income Tax Assessment Act 1997 section 118-200 | Income Tax Assessment Act 1997 s ubsection 118-200(2) | Income Tax Assessment Act 1997 subsection 118-200(3)

Reasons for decision: Summary: With respect to Property One, as the sale of the property was delayed due to the Will being challenged the Commissioner will exercise his discretion under subsection 118-195(1) of the ITAA 1997 to extend the two year time limit to XX/XX/XXXX. Accordingly any gain or loss on Property One can be disregarded. Property Two was acquired by the deceased post 1985 and part of it was being used to produce assessable income just before the deceased's death. Therefore, Property Two does not satisfy either of the two conditions set out in column 2 of the table in subsection 118-195(1) of the ITAA 1997. As none of the conditions in column 2 of the table are satisfied, the exemption under subsection 118-195(1) of the ITAA 1997 cannot be applied in this case, even if the Commissioner allowed an extension to the two year time limit so that one of the conditions in column 3 is satisfied. However, the Commissioner will exercise his discretion under section 118-200 of the ITAA 1997 to extend the two year time limit to XX/XX/XXXX to allow a partial exemption for the capital gain or loss made on disposal of Property Two. It is appropriate to exercise the discretion as the sale of this property was also delayed due to the challenge of the Will. | Detailed Reasoning - Deceased estate and main residence: Subdivision 118-B of the ITAA 1997 includes provisions about an exemption from CGT which apply to main residences as well as specific rules in regard to dwellings which you acquire as the executor or beneficiary of a deceased estate. For CGT purposes, if you acquire real estate as the trustee of a deceased estate, you are taken to have acquired the real estate on the day the deceased person died. If the date of death is after 20 September 1985, any real estate you acquire in your capacity as trustee of the deceased estate will be a post-CGT asset in your hands. If you dispose of a CGT asset that you acquire as trustee of a deceased estate, CGT event A1 happens. Generally, the time of the event is when the contract for the disposal is entered into. If there is no contract, the event occurs when the change of ownership takes place. The term 'CGT asset' is defined in subsection 108-5(1) of the ITAA 1997 as: (a) any kind of property; or (b) a legal or equitable right that is not property. Examples of CGT assets are noted in subsection 108-5(2) of the ITAA 1997 which includes land and buildings. | Detailed Reasoning - What is a dwelling for CGT purposes?: For the purposes of the main residence exemption, a dwelling includes a unit of accommodation that is a building, or is contained in a building, and consists wholly or mainly of residential accommodation, a unit of accommodation that is a caravan, houseboat or other mobile home, and any land immediately under the unit of accommodation (section 118-115 of the ITAA 1997). The definition of dwelling is an inclusive one so the word has its ordinary meaning in addition to the meanings attributed to it under section 118-115 the ITAA 1997. The Macquarie Dictionary 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW defines the word 'dwelling' as a place of residence or abode; a house; continued or habitual residence. Whether a structure is a dwelling for CGT purposes will depend on the facts of each case. In Campbell v. O'Sullivan [1947] SASR 195 at 201 it was held that: .."Dwelling" ordinarily signifies a place of abode or residence, a tenement, habitation, or house, which premises a person or persons are using as a place for sleeping, and usually for the provision of some or all of their meals. The word is not used as a term of art, and has to be interpreted in accordance with its ordinary, proper, and grammatical sense in the context in which it appears ... The Australian Taxation Office publication Guide to capital gains tax also states a dwelling is anything that is used wholly or mainly for residential accommodation, such as: ● a home or cottage ● an apartment or flat ● a strata title unit ● a unit in a retirement village ● a caravan, houseboat or other mobile home. | Detailed Reasoning - Extension to adjacent land: Section 118-120 of the ITAA 1997 provides that the main residence exemption can include land adjacent to the dwelling to the extent that it is used primarily for private or domestic purposes in association with the dwelling. Sub-section 118-120(3) of the ITAA 1997 specifies the maximum area of land that is covered by the main residence exemption (including the area under the dwelling) must not exceed 2 hectares. | Detailed Reasoning - Meaning of dwelling - Application to the Estate's circumstances: You have argued that with respect to Property Two, it should be considered that the portion of the property that the deceased had resided in was a separate dwelling from the remaining part of the building and that all the land surrounding the building (broadly the garden) should be considered adjacent land to that separate dwelling. Whether a structure is a dwelling for CGT purposes will depend on the facts of each case as noted above. In this case, the area the deceased lived in, the other accommodation and the common areas of the property are connected and form part of the entire structure of the building and are not separate building structures such as a granny flat or cottage built on the land at XXX. Further the building structure erected on the property is a house as acknowledged by you in your private ruling application as opposed to, for example, a duplex, a set of flats, units or apartments or two distinct dwellings on one property title. While parts of the house were used to provide shared accommodation there is no information to indicate this part of the property has been converted into separate commercial premises with its own separate title. The deceased slept in one of the bedrooms of the house and had access to the entire house such as the kitchen and sitting rooms and common areas. Further the house was used by the deceased to provide family members with residential accommodation at various times which would support the view that the building is a single dwelling rather than two separate dwellings. Therefore, given the reasons above, the house located at XXX is a single dwelling for the purposes of section 118-115 of the ITAA 1997. However, as the dwelling has also been used for income producing purposes, any capital gains tax exemption that is applicable will have to be apportioned (see discussion further below). | Detailed Reasoning - Dwelling acquired from a deceased estate: Section 118-195 of the ITAA 1997 provides that a capital gain or capital loss you make from a 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 following table are satisfied. Beneficiary or trustee of deceased estate acquiring interest Column 1 Column 2 Column 3 Item One of these items is satisfied 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 | Detailed Reasoning - Partial exemption: However, where the requirements of section 118-195 of the ITAA 1997 have not been met, section 118-200 of the ITAA 1997 may provide a partial exemption for deceased estate dwellings. You calculate your capital gain or capital loss using the following formula: Capital gain or capital loss amount x Non-main residence days Total days where: non-main residence days is the sum of: (a) if the deceased acquired the ownership interest on or after 20 September 1985 - the number of days in the deceased's ownership period when the dwelling was not the deceased's main residence; and (b) the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of an individual referred to in item 2, column 3 of the table in section 118-195. total days is: (a) if the deceased acquired the ownership interest before 20 September 1985 - the number of days in the period from the death until your ownership interest ends; or (b) if the deceased acquired the ownership interest on or after that day - the number of days in the period from the acquisition of the dwelling by the deceased until your ownership interest ends Subsection 118-200(3) of the ITAA 1997 allows the formula to be adjusted to ignore non-main residence days and total days after the deceased's death if the deceased acquired the ownership interest on or after 20 September 1985 and your ownership interest ends within 2 years of the date of the deceased's death if you get a more favourable result by doing so. A partial exemption allowable under section 118-200 of the ITAA 1997 must be further reduced (if part of the property was used to produce assessable income) in accordance with section 118-190 of the ITAA 1997. | Detailed Reasoning - Use of dwelling for producing assessable income: Subsection 118-190(1) of the ITAA 1997 states if a dwelling that was a person's main residence is used to produce assessable income, and if a loan had of been taken out to acquire the dwelling, that person could have deducted some or all of the interest, then any capital or loss cannot be fully disregarded. The interest deductibility test applies regardless of whether or not money was actually borrowed to acquire the dwelling. The test must be applied on the assumption that money was borrowed to acquire the dwelling. If part of a person's home was rented out, the person would be entitled to deduct part of the interest if they had borrowed money to acquire the dwelling. If the person ran a business or professional practice in part of their home, they would be entitled to deduct part of the interest on money they borrowed to acquire the dwelling if: ● part of the dwelling was set aside exclusively as a place of business and was clearly identifiable as such, and ● that part of the home was not readily adaptable for private use, for example, a doctor's surgery located within the doctor's home. Commissioner's Discretion The Explanatory Memorandum for the Tax Laws Amendment (2011 Measures No. 9) Act 2012 explains the Commissioner would be expected to exercise discretion (in sections 118-195 and 118-200) 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. ● These examples are not exhaustive. In exercising this discretion, the Commissioner is expected to consider whether and to what extent the dwelling is used to produce assessable income and the period that the trustee or beneficiary held the ownership interest in the dwelling. | Detailed Reasoning - Property One: Property One was acquired by the deceased prior to 20 September 1985 (pre-CGT interest). As item 2 of column 2 has been satisfied, any capital gain made on the disposal of the dwelling can be disregarded under section 118-195 of the ITAA 1997 provided the property is sold within two years of the deceased's death. In this case, the property was not sold within the two year period. However, using the guidelines provided on the Commissioner's discretion to extend the two year time period under section 118-195 of the ITAA 1997, in particular point 1 above, the Commissioner will exercise his discretion to extend the two year period until the date of settlement on XX/XX/XXXX. Accordingly, the Executors can disregard any capital gain or loss on the disposal of Property One. | Detailed Reasoning - Property Two: Property Two was acquired by the deceased post 1985 and part of it was being used to produce assessable income just before the deceased's death. Therefore, Property Two does not satisfy either of the two conditions set out in column 2 of the table in subsection 118-195(1) of the ITAA 1997. As none of the conditions in column 2 of the table are satisfied, the exemption under subsection 118-195(1) of the ITAA 1997 cannot be applied in this case, even if the Commissioner allowed an extension to the two year time limit so that one of the conditions in column 3 is satisfied. However, the Commissioner will exercise his discretion to extend the two year period until the date of settlement on XX/XX/XXXX to allow a partial exemption under section 118-200 of the ITAA 1997. The partial exemption is calculated using the formula set out in subsection 118-200(2) and (3) of the ITAA 1997. The resulting assessable capital gain will then need to be increased based on the extent to which the property was used to produce assessable income in accordance with section 118-190 of the ITAA 1997. In determining the amount of the partial exemption to be applied to the land it would be expected the same apportionment that applied to the dwelling would be used as the other residents had access to the gardens and were free to use them. Other information You notified the Commissioner by email of your withdrawal of the apportionment question in the Estate's application for a private ruling. Therefore we have not ruled on the apportionment question but we have provided some guidance above in relation to apportionment.