Private ruling: Capital gains tax - deceased estate - Commissioner's discretion to extend the two year period to dispose of an inherited dwelling.
Date of advice: 8 October 2015
Published: October 2015
Ruling period: Income 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 to dispose of the inherited property? | A1: Yes.

Relevant facts and circumstances: Your parents, Parent A and Parent B, purchased a property (the property) after 20 September 1985, on which a dwelling was located (the dwelling). The land area of the property was over 10 hectares. A number of years later, the property was subdivided into the following lots: • Lot 1, which your parents sold to your sibling and their spouse; and • Lot 2, which was kept by your parents, and on which the dwelling was located. The land area of Lot 2 was over 10 hectares. Parent B passed away a number of years later and Parent A inherited Parent B's ownership interest in Lot 2. Parent A (the deceased) passed away around six years later. Lot 2 had been the deceased's main residence until the time he/she passed away. You and your sibling were appointed as the Trustees of the deceased's estate. In accordance with the deceased's will, you and your sibling were bequeathed equal shares in Lot 2. Probate on the deceased's estate was granted a number of months after the deceased passed away. The title of Lot 2 was transferred into your name and your sibling's name on around five months after the deceased had passed away. You and your sibling determined that part of Lot 2 was suitable for primary production, but that the rest of the property would be sold. You and your sibling engaged lawyers and surveyors about a month after the title had been transferred into your names to subdivide Lot 2. The proposed subdivision to be undertaken in two stages as follows: • Stage 1 Subdivide off a parcel of land with no residence, known as Lot A, with the intention to sell this lot after the subdivision had occurred; and • Stage 2 Undertake a boundary adjustment to transfer part of Lot 2 to Lot 1. The combined Lot was to be used for primary production. The remainder of Lot 2, known as Lot B, after the completion of both stages of the subdivision, was to be sold after both of the subdivisions were completed. The deceased's dwelling was located on this lot. The submission for the two stages of the subdivision was lodged with the Council together with the intention that both subdivisions would occur concurrently. However, the Council insisted that the two stages of the subdivision occur sequentially, with Stage 1 required to be completed and registered before they would even consider Stage 2. A development application in relation to the original subdivision was submitted about two months after the title transfer, with the development consent being granted later still. Consultants then began work on a subdivision covering both Stage 1 and 2. However, after advice from Council this was not submitted. Instead the work began on separate submissions for Stage 1 and Stage 2. You and your sibling were keen to sell Lots A and B, but had initially held off listing the properties for sale due to the subdivision Lot A was put on the market around 17 months after the deceased had passed away even though the subdivision was ongoing with the expectation that the subdivision would be completed in a reasonable amount of time. The Stage 1 submission, relating to Lot A, was commenced around 19 months after the deceased had passed away. The Stage 2 submission, relating to Lot B, required a boundary adjustment and was commenced around 21 months after the deceased had passed away. The Stage 2 submission was submitted around 22 months after the deceased passed away. Council would not approve the boundary adjustment until the Stage 1 subdivision had been registered. Lot B was put on the market on around 22 months after the deceased had passed away, while the subdivision was being finalised. An offer for Lot B was accepted about a months after it had been put on the market, with the contract being signed around a month later. The Stage 1 submission was submitted to the Council about two years after the deceased passed away. An offer for Lot A was accepted about 12 months after it had been put on the market, with the contract being signed around two months later. The Stage 1 subdivision was registered around 30 months after the deceased passed away, with the boundary adjustment being registered around one month later. The Stage 2 subdivision submission was submitted around 32 months after the deceased passed away. An offer for Lot B was accepted about a month after the lot had been put on the market, with the contract being signed in the following month. The subdivision of Stage 2 was registered around 35 months after the deceased had passed away. The land area of Lot B was about one hectare. Settlement on the sale of Lot B occurred around three years after the deceased had passed away. You have made the following statements in the private ruling application: • The marketing for sale of the property, and the subsequent exchange of contract for sale, was delayed due to an ongoing subdivision of the property. • The settlement of the sale of Lot B was significantly delayed, occurring almost 12 months after exchange due to the ongoing subdivision. • The settlement of both Lots A and B were delayed due to the ongoing subdivisions, as both contracts were subject to the subdivisions being completed. • Before either lot had been placed on the market, you had received advice from the council regarding the need to submit two separate subdivisions. The process for Lot A appeared straight forward, requiring just a subdivision submission. The process for subdivision of Lot B appeared more complicated, requiring two steps, consent for the boundary adjustment and then a subdivision submission. It was determined that Lot A would be able to be sold first and was therefore placed on the market at an earlier date; and • When commencing the subdivision process you had a reasonable expectation that this process would not take longer than twelve months. This would have allowed you sufficient time to negotiate a sale of the property within the two year period. The Council requirement to stage the subdivision applications was not determined until over six months after the process had been commenced. Settlement of the property took place within one month of the final stage of the subdivision being registered.

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

Reasons for decision: Summary: The capital gains provisions allow for concessional treatment to be given to a dwelling that was owned by a deceased person if the executors of the deceased person's estate sell that dwelling within two years of the date of death. Any capital gain or capital loss made on the sale of such a dwelling is disregarded if the dwelling was: • Acquired by the deceased before 20 September 1985, or • The deceased's main residence when they died The Commissioner has the discretion to extend the two year period. This extension is generally only granted where the executors are merely arranging the ordinary sale of the dwelling and the cause of the delay is beyond their control (for example, if the will is challenged). There must not be any other factors mitigating against exercising it. In this case, you were progressing toward completing the sale of the property within the two year deadline. However, delays were experienced due to the events disclosed in your private ruling request. As a result of these delays, the sale of Lot B could not be completed until just after the two year deadline expired. After reviewing the facts of this situation, the Commissioner accepts that it is appropriate to grant the extension that you have requested.