Private ruling: CGT – Deceased estate – Main residence exemption – 2 year extension
Date of advice: 30 May 2018
Published: August 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

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 XXXXXXX XXXX to disregard the capital gain or loss made on disposal of the property? | A1: No


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

Reasons for decision: Summary: The capital gains provisions allow for concessional treatment to be given to a dwelling that was owned by a deceased person if the Executors of the deceased person’s estate sell that dwelling within two years of the date of death. The deceased acquired the dwelling before 20 September 1985 In accordance with section 118-195 of the ITAA 1997, a capital gain or capital loss that is made on the disposal of a property acquired by the deceased prior to 20 September 1985 is disregarded if: ● your ownership interest ends within two years of the deceased’s death; or ● from the deceased’s date of death until your ownership interest ends, the property was the main residence exemption of either the spouse of the deceased or an individual who had a right to occupy it. The two year period begins on the date of the deceased’s death. However, subsection 118-195(1) of the ITAA 1997 confers on the Commissioner discretion to extend the two year exemption period. Generally, the Commissioner would only exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example: ● 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 ● the 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, but provide guidance on what factors the Commissioner would consider reasonable to exercise his discretion to extend the two year period to dispose of an inherited dwelling. In exercising the discretion the Commissioner will also take into account how long the trustee or beneficiary held the ownership interest in the dwelling and the extent to which the dwelling has been used for other purposes, such as: ● producing assessable income ● a main residence for a beneficiary or associates of the beneficiaries ● renovations or other activities designed to increase the sale price, or ● waiting for the property market to improve. Whether the Commissioner will exercise his discretion under subsection 118-195(1) of the ITAA 1997 will depend on the facts of each case. | Detailed Reasoning - Application to your circumstances: In this case, the deceased passed and Executors and the beneficiaries were aware at the time that the capital gains tax provisions would apply if the sale of property was delayed beyond two years from the date the deceased passed away. The disposal of the property was not as a result of factors outside the Executors and the beneficiaries control but was as a result of the actions and choices of the Executors and the beneficiaries made to postpone the sale of the property until the renovations were completed to the new owner’s property. Further, there is no information to indicate there has been a challenge to the Will, the estate was of a complex nature and that there were unforeseen or serious personal circumstances preventing the sale of the property. 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 will not apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit until XX XXXXXXX XXXX as the facts of this situation are not of a nature that would be acceptable for the exercising of the Commissioner’s discretion. The normal capital gains tax (CGT) rules will apply to the disposal of the property.

A person (the deceased) died. | A number of family members are the Executors of the Estate (the Executors). | One of the main assets of the deceased was a strata titled unit (the property) located in a block of flats. | Another unit located in the block of flats was purchased by a new owner. | The new owner is not related to the deceased and or the deceased’s family members | The new owner of the property advised the Executors they intended to carry out extensive renovations to their unit which would require increasing the floor area of their unit into the common property area of the block of flats. | The beneficiaries and the Executors decided to postpone the sale for the property until the renovations were completed as they expected the renovations to be completed before the expiry of the two year time limit. | Probate for the deceased estate was granted by a court. | Renovations to the new owner’s property were completed before the expiry of the two year time limit. | The property of the deceased was not listed for sale until after the expiry of the two year time limit. | The property sold several months after the expiry of the two year time limit. | The sale of the property was settled on XX XXXXXXX XXXX.