Private ruling: Capital gains tax - deceased estate - Commissioner's discretion
Published: July 2014
Ruling period: Year ended 30 June 2014.
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: The dwelling was built for your parents and it was used as their main residence until your remaining parent passed away and left the dwelling to you in equal shares. The transfer was first registered. However there were several other interactions between us and the solicitors and the land registry. You only received confirmation, of the transfer of title when you contacted the solicitor. The dwelling remained vacant from the time they died until it was disposed of. Following the bereavement process and significant time spent tidying the property, you appointed a real estate agent to sell the dwelling. The agent suggested some minor damage be repaired to make the dwelling more marketable. These repairs were made but delayed the initial advertisement. The settlement of the contracts of sale over the dwelling were cancelled or delayed through circumstances outside of your control. These circumstances are listed below. • Contract 1 was signed. This contract was subject to finance and was cancelled by the buyer. • The real estate agent that we appointed took leave which resulted in lost time as you had to appoint a new agent. • Contract 2 was signed. This contract was subject to finance and was cancelled by the buyer. • The property was auctioned. Unfortunately the property was passed in at significantly less than the reserve price. • Contract 3 was signed by the buyer. This contract was subject to special conditions that the buyer wanted included. Before signing you sought legal advice through your solicitors about these conditions. There was some time delay whilst these conditions were sorted out. You signed an amended contract and it was sent to the buyer's solicitors. The buyer did not sign the contract and no further communications were forthcoming. • Contract 4 was signed. The buyers wanted a 60 day contract which resulted in the disposal of the dwelling one month and 2 years after the death of your parent.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | 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 dwelling passed to each of you. The dwelling was the deceased's main residence prior to death, and at that time, was not being used to produce assessable income. However, the dwelling was not occupied by a relevant individual after the deceased's death. 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 dwelling 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. In your case, the delay in disposing of the property was caused by settlement of a contract of sale over the dwelling unexpectedly falling through for reasons outside the beneficiary or trustee's control and these delays prevented you from disposing of the property within the two year time limit. 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.