Private ruling: Capital Gains Tax
Published: July 2014
Ruling period: Year ending 30 June 2015.
Date scheme commenced: 1 July 2014.

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: The deceased purchased the property, and dwelling, prior to 20 September 1985. It was decided amongst the beneficiaries to have plans for subdivision of the property drawn up and submitted to council. You consulted town planners regarding the subdivision. You applied to the Council for subdivision approval. You applied to an arbitration tribunal (the Tribunal). The Council notified you they did not approve the application on the same day as you applied to the Tribunal. You attended a hearing of the Tribunal. The Tribunal made a finding that referred you to submitting a new application to the Council. A new application was lodged with the Council. The Council has not yet made a decision on the new application.

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) Explanatory memorandum to the Taxation Laws Amendment Bill (No.9) of 2011 (Cth)

Reasons for decision: Summary: A capital gain or capital loss may be 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 and a beneficiary of a deceased estate or you owned it as the trustee of the deceased estate. For a dwelling acquired by the deceased prior to 20 September 1985, 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 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 the CGT event was brought about by that person, or • your ownership interest ends within two years of the deceased's death. In your case, when the deceased died, the dwelling passed to 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 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 dwelling sale will settle 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. 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 sale of the dwelling has been delayed due to attempts to have it subdivided and the delay involved with that process. This is not a reason that is out of your control, the dwelling and land could be sold as is without subdivision, and is not a situation in which the Commissioner would generally exercise his discretion. 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. The normal capital gains tax (CGT) rules will apply to the disposal of the property.