Private ruling: Capital gains tax - main residence exemption
Date of advice: 23 May 2017
Published: September 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Ac t 1997 (ITAA 1997) and extend the two year period? | A1: Yes

Relevant facts and circumstances: The deceased passed away. The property was acquired by the deceased. The deceased used the property as their main residence for the entire ownership period. The property was never used for income producing purposes. The deceased entered a care facility and did not return to the property. It remained as the principal place of residence. A person was appointed by the court to manage the deceased's financial affairs as the deceased was ill and had no family in Australia. As it was obvious the deceased was too ill to return to their home, the court appointed person began the process of negotiating with real estate agents to sell the property. A real estate agent was signed to auction the property. Days prior to the auction, the deceased passed away. The appointed person notified the real estate agents to cancel the auction. This was necessary under law as they only had court authority to act on the deceased's behalf while they were still living. From then onwards, instructions concerning the property had to originate from the executor of the estate. The deceased was single, with no family members in Australia. There was a lengthy delay to locate the Will, then find and notify the overseas executor of the will. The overseas executor was also the sole beneficiary. Member of the extended family of the deceased brought legal action disputing the validity of the Will. As the executor in the Will lived overseas, they appointed Australian lawyers. For several years, no person had the legal capacity to make any decisions concerning the Property. During this time, the property remained vacant. The Will was found valid and would stand. This legal process included involvement from the lawyers that drafted the Will and witnesses to its signing, obtaining forensic evidence and attending to other procedures. Once the executor had authority to act, they arranged (through their lawyers), for the property to be placed on the market, with an auction. The property sold. The property did not settle due to finance and an extension of time was granted. The purchaser failed again to find funding. After the legal process on the failed purchase, the executor placed the property back on the market. The property sold and settled.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 118-195(1)

Reasons for decision: Summary: Subsection 118-195(1) of the ITAA 1997 states that if you own a dwelling in your capacity as trustee of a deceased estate (or it passed to you as a beneficiary of an estate), then you are exempt from tax on any capital gain made on the disposal of the property if: ● the property was acquired by the deceased before 20 September 1985, or ● deceased acquired dwelling after 20 September 1985 and it was their main residence just prior to death and ● your ownership interest ends within two years of the deceased's death (the Commissioner has discretion to extend this period in certain circumstances). You have an ownership interest in a property if you have a legal interest in the property. This means that if you sell a property, your ownership interest continues until the date of settlement (rather than the date the contract of sale is signed). In this case, the property was purchased by the deceased before 20 September 1985 but was not sold within two years of the deceased's date of death. The Estate will only be able to disregard the capital gain from the sale of the property if the Commissioner extends the two year time period. The Commissioner can exercise his discretion in situations such as where: ● 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 circumstances outside the beneficiary or trustee's control Having considered your circumstances and the relevant factors, the Commissioner is able to apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension of time.