Private ruling: capital gains tax
Published: November 2013
Ruling period: Year ended 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2012

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 for the estate to obtain the main residence exemption? | A1: Yes. | Q2: Will the Commissioner exercise his discretion under subsection 152-80(3) of the ITAA 1997 and allow extra time for the estate to obtain the small business capital gains tax (CGT) concessions in relation to the capital gains made on the sale of the properties purchased after 20 September 1985? | A2: Yes.

Relevant facts and circumstances: The deceased passed away during the 2010-11 financial year. The deceased was carrying on a primary production business up until they passed away. The deceased owned property and acquired interests in the property both before and after 20 September 1985. Part of this property was the main residence of the deceased. The deceased would have been entitled to apply the small business capital gains tax concessions, to the land used by the business that was acquired after 20 September 1985. Probate was granted on in the 2011-12 financial year. The delay in granting probate was due to administrative procedures of the probate office. The deceased estate had multiple beneficiaries. Several of the beneficiaries expressed an interest in purchasing the properties. The executors made a decision to place the property on the open market whereby any of the beneficiaries would have the opportunity to purchase all or part of the land. At this point, one of the beneficiaries sought legal advice and a freeze was placed on the assets of the estate. The property was removed from the market and a mediation session was held to resolve the matter. The issues were eventually resolved at mediation. One of the beneficiaries will purchase all but one of the properties. The remaining property has been placed on the market for sale.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 104-10(5) | Income Tax Assessment Act 1997 subsection 118-195(1) | Income Tax Assessment Act 1997 subsection 128-50(2) | Income Tax Assessment Act 1997 paragraph 152-10(1)(b) | Income Tax Assessment Act 1997 subsection 152-10(1) | Income Tax Assessment Act 1997 subsection 152-80(3)

Reasons for decision: Summary: Subsection 118-195(1) of the ITAA 1997 allows you to disregard a capital gain (or loss) made on the disposal of a property acquired from a deceased estate, if certain conditions are satisfied. The conditions relevant to your circumstances are: · the deceased acquired the ownership interest on or after 20 September 1985 and the dwelling was the deceased's main residence just before their death and was not then being used to produce assessable income and · your ownership interest ends within two years of the deceased's death, or within a longer period allowed by the Commissioner. In this case, the property that was the main residence of the deceased was acquired after 20 September 1985. The property will be sold outside the two year period outlined in subsection 118-195(1) of the ITAA 1997. Therefore, you will only be able to disregard the capital gain from the sale of the property if the Commissioner grants an extension to the two year time limit. 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 beneficiary held it. | Detailed Reasoning - Application to your circumstances: In this case, one of the beneficiaries of the will sought legal advice regarding their entitlement to the deceased's property. As a result, a freeze was place on the property and the estate was unable to dispose of it. A mediation session was held and eventually the issues were resolved. 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. | Detailed Reasoning - Question 2: When a taxpayer acquires a CGT asset, including acquisition by inheritance, they are potentially liable for tax on any capital gain on that asset when a CGT event subsequently happens to it. If a CGT asset is owned by joint tenants and one of them dies, the survivor is taken to have acquired the deceased individual's interest in the asset on the day they died under subsection 128-50(2) of the ITAA 1997 . In some instances, a taxpayer can reduce the capital gain some instances, a taxpayer can reduce the capital gain made from a CGT event by applying the small business CGT concessions. Section 152-80 of the ITAA 1997 potentially extends the availability of the small business CGT concessions to an asset held by a legal personal representative or beneficiary of a deceased estate, to the extent that the deceased would have been entitled to the concessions, if a CGT event happens to the asset within two years of the death. Section 152-80 of the ITAA 1997 allows either the legal personal representative of an estate or the beneficiary to apply the small business CGT concessions in respect of the sale of the deceased's asset in certain circumstances. Specifically, the following conditions must be met: · the asset devolves to the legal personal representative or passes to a beneficiary, and · the deceased would have been able to apply the small business concessions themselves immediately prior to their death, and · a CGT event happens within two years of the deceased's death unless the Commissioner extends the time period in accordance with subsection 152-80(3) of the ITAA 1997. In this case, when the deceased died the property passed to the legal personal representative. As the deceased would have been able to apply the small business concessions to the land acquired after 20 September 1985, had they disposed of this land immediately prior to their death, the beneficiaries would also have access to the concessions had they disposed of the land within two years of the deceased's death. The estate will only be able to apply the small business CGT concessions if the Commissioner extends the two year time period. In determining whether the discretion to allow further time would be exercised, the Commissioner has considered the following factors: · evidence of an acceptable explanation for the period of the extension requested (and whether it would be fair and equitable in the circumstances to provide such an extension) · prejudice to the Commissioner which may result from the additional time being allowed (but the mere absence of prejudice is not enough to justify the granting of an extension) · unsettling of people, other than the Commissioner, or of established practices · fairness to people in like positions and the wider public interest · whether any mischief is involved, and · consequences of the decision. | Detailed Reasoning - Application to your circumstances: In this case, there was a delay in probate being granted due to the administrative requirements of the probate office. Legal council was engaged by the estate to assist in this process and probate was eventually granted during the 2011-12 financial year. The estate had multiple beneficiaries and several of these beneficiaries expressed an interest in purchasing the properties. The Commissioner is able to grant an extension of time where there is a reasonable explanation for an extension. Having considered the relevant facts, the Commissioner is able to apply his discretion under subsection 152-80(3) of the ITAA 1997 and allow an extension in relation to the land purchased after 20 September 1985. The period of extension has a reasonable explanation given the circumstances and by allowing the extension will enable the beneficiaries to apply the small business concessions as would have been able to be applied by the deceased just prior to their death.