Private ruling: Capital gains tax - deceased estate - Commissioner's discretion - two year period
Date of advice: 27 April 2016
Published: June 2016
Ruling period: Year ended 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 until settlement? | A1: No.

Relevant facts and circumstances: The deceased acquired a dwelling (the dwelling) The deceased passed away in 20XX (the deceased) The dwelling was the deceased's main residence. The dwelling has not been used to produce assessable income. The beneficiaries of the estate are you and your sibling, ('A'). 'A' and their spouse resided in the dwelling from 200X. 'A' was diagnosed with a medical condition in early 20XX and required surgery and ongoing treatment. 'A' separated from their spouse a short time later. 'A' continued to reside in the dwelling and was unable to return to work. 'A' condition stabilised and alternative accommodation was obtained in 20YY. The dwelling required some maintenance and repairs and these were undertaken personally by you and your spouse. The works undertaken included cleaning, rubbish removal and minor repairs. Your child resided in the dwelling around 20YY for a period of time, whilst their dwelling was being renovated. A neighbour approached you around month 20ZZ to purchase the dwelling, however due to their personal circumstances they did not continue with the purchase. The dwelling was listed for sale with a real estate agent and an offer to purchase the dwelling was received a short time later. Settlement occurred after a period of time.

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. For a dwelling acquired by the deceased on or after 20 September 1985, the dwelling must have been used as the deceased's main residence just before their death and not used to produce assessable income at that time. In your case, when the deceased died, an interest in 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 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. 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. The Commissioner expects the executor of a deceased estate to make reasonable enquiries about matters that affect the administration of the estate. 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. In your situation, you should have been aware that there were conditions that had to be met if the sale of the property was to be exempt from the capital gains provisions. The renovations to the dwelling after 'X' moved out have delayed the sale of the property. However, this was not an impediment to the sale of the property, but may have affected the sale price you would receive. Increasing the potential sale price of your property is not a reason to exercise the discretion. In addition, you were able to engage others to undertake the renovations if required. While we appreciate your particular circumstances, the period taken to dispose of the dwelling once 'X' had vacated the dwelling is too lengthy. 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 settlement. The normal capital gains tax (CGT) rules will apply to the disposal of the property.