Private ruling: Deceased estate main residence CGT exemption
Published: September 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

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 to when your ownership interest in the property ceased? | A1: Yes. | Q2: Can you disregard any capital gain or loss that arises from the disposal of the property under section 118-195 of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: On dd/mm/yyyy, the deceased purchased the property. The property was their main residence and was never used to produce assessable income. The deceased passed away on dd/mm/yyyy. In accordance with the will, their partner continued to live in the house until they passed away on dd/mm/yyyy. The property was listed for sale within three weeks of their passing, by dd/mm/yyyy. The property market in the area was quite depressed and the executor placed the property with a local agent using a recommended asking price. The asking price was above market price, and the executor did not realise until more than one year had passed and no reasonable offers had been made. The executor did not have any additional knowledge of the real estate market and relied solely on the advice of the real estate agent. The executor of the estate resided between two countries, for work purposes. They moved overseas permanently for work within 12 months of the deceased's passing and was unable to take proper control of the sale, which delayed the sale process. A family friend and solicitors were left to handle the sale of the property and other assets. An offer was made on the property, which was accepted by the executor, however the sale was not completed as the prospective purchaser was not able to obtain the necessary finance. The property was sold with a contract signed on dd/mm/yyyy.

Relevant legislative provisions: Income Tax Assessment Act 1997 (ITAA 1997) section 118-195

Reasons for decision: Summary: As per subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997), a capital gain or capital loss you make from a capital gains tax (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 table are satisfied. | Detailed Reasoning - 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 In this case, when the deceased died the property passed to the legal personal representative. The property was not used to produce assessable income and it was their main residence just before their death. You will only be able to disregard the capital gain from the sale of the property if the Commissioner extends the time period in which you can choose to dispose of the property. 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 the beneficiary held it. In this case, the delay caused by the depressed property market and the fall through of a purchase offer was outside your control. This prevented you from disposing of the property within the two year time limit. The property was never used to produce assessable income and was held for just over two years. The property was listed for sale through a local real estate agent shortly after the deceased passed away. Being listed at an unknowingly overpriced value upon the advising of the agent, however, the property did not attract any prospective buyers. Generally, it would be reasonable to rely on the advice given by an expert in their field, however the advice that you received contributed to the delay in the sale of the property, after the two year exemption period. Additionally, in accordance with the will, the deceased's partner was entitled to continue living at the property after their passing. 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 when your interest in the property ceased. As a result of extending the two year time limit, you will satisfy all of the conditions contained in section 118-195 of the ITAA. Accordingly, you can disregard any capital gain or loss that arises as a result of the disposal of the property.