Private ruling: Capital gains tax - deceased estate - Commissioner's discretion to extend the two year period - main residence exemption
Published: May 2014
Ruling period: Specified date in 2014
Date scheme commenced: 1 July 2013.

Ruling: Q1: Will the Commissioner exercise 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: Yes

Relevant facts and circumstances: Your parent-in-law owned a property. Your parent-in-law resided in this property as their main residence until their death more than two years ago. Since your parent-in-law's death the property has remained vacant. The beneficiaries of your parent-in-law's will are their children: • You and your spouse intended to buy their sibling's interests in property at market value. • Approximately eight months ago your parent died. • Despite the fact that you and your spouse had a minimal mortgage on your family home and you had successfully run your own business for more than 25 years, securing finance delayed the actual transaction. • Approximately 11 months ago, your other parent-in-law suffered a severe medical condition. • Your other parent-in-law was hospitalised due to this medical condition and they undertook a period of intensive rehabilitation. • Your other parent-in-law now requires constant and intensive family support. • Since your other parent-in-law's medical condition the family's priority has been the care and support for your other parent-in-law. • You and your spouse became your other parent-in-law's primary carer as you resided the closest to them. • Your spouse did not have time to pursue the purchase of the property during this time. • Your spouse was your other parent-in-law's transport and their carer. • Your spouse was your other parent-in-law's financial power of attorney and spent a significant amount of time looking after their financial affairs, as well as their medical care and accommodation needs. • Late last year your spouse suffered a sudden and severe medical condition which resulted in their death shortly after. • You have inherited your spouse's interest in the property. • The combined effect of these personal shattering events has affected your family but they are still focused on the continuing support of your other parent-in-law as they require daily care. • Even though you have suffered a number of personal distressing events you have continued the primary responsibility for your other parent-in-law's care and transport. • You and the other beneficiaries have not been focused on the finalising of your parent-in-law's estate by disposing of the property within the two year timeframe. • Due to the death of your spouse you have decided not to go ahead with the purchase of the property. • All of the beneficiaries have decided to dispose of the property. • The property will be prepared, marketed and settlement on its disposal will occur prior to a specified date.

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)

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, an interest in the property passed to you through your late spouse's estate. 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. The delay in disposing of the property was due to you being unable to attend to the deceased estate due to serious personal circumstances arising during the two year period. 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 able to apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit to a specified date.