Private ruling: Capital gains tax - deceased estate - Commissioners discretion - two year period
Published: March 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? | A1: No.

Relevant facts and circumstances: Your parent (the deceased) acquired a property prior to 20 September 1985, which was their main residence. The deceased died more than two years ago. You and your siblings are the beneficiaries of their estate. Probate was granted by the Supreme Court of the relevant state of Australia almost two years ago. You and your siblings became entitled to the property almost two years ago. The property has never been used to produce assessable income. The property has been rezoned from residential to medium density construction. The rezoning of the property made it a viable option for developers to purchase and develop. You and your siblings attempted to dispose of the property by auction but you did not receive an acceptable price. You and your siblings have entered into a contract for sale with settlement to occur on its disposal in the next month.

Relevant legislative provisions: 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 property passed to you. The property was the deceased's main residence prior to death, and at that time, was not being used to produce assessable income. However, the property was not occupied by a relevant individual after the deceased's death and therefore this basis of exemption is not available. 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 property 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, there appears to be no exceptional circumstances which restricted you and your siblings from disposing of the property within two years of the deceased's date of death. 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 not able to apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit. The normal CGT rules will apply to the disposal of the property. | Detailed Reasoning - CGT: The most common CGT event, CGT event A1, occurs when you dispose of an asset to another entity. The time of the event is when you enter into the contract for disposal of it, or if there is not contract when the change of ownership occurs. If two or more people acquire a property asset together it can be either tenants in common or as joint tenants. If a tenant in common dies, their interest in the property is an asset of their deceased estate. This means it can be transferred only to a beneficiary of the estate to be disposed of (or otherwise dealt with) by the trustee/s of the estate. | Detailed Reasoning - Deceased estate - main residence: Special rules apply to the asset that was a deceased person's main residence. If you inherit a deceased person's dwelling, you may be exempt or partially exempt when a CGT event occurs to it. Information on how CGT applies is available on our website - www.ato.gov.au.