Private ruling: Capital gains tax - deceased estate - Commissioner's discretion to extend the two year period - main residence exemption
Published: April 2014
Ruling period: Year ended 30 June 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 A owned a property which they resided in as their main residence until their death two years ago. Since your parent A's death the property has remained vacant. The beneficiaries of your parent A's will are their children. Your sibling C intended to buy the property from their siblings' interest in the property at market value. Despite the fact that sibling C had a minimal mortgage on their family home and they had successfully run their own business for more 30 years, securing finance delayed the actual transaction. Mid last year your parent B suffered a severe medical condition. Your parent B was hospitalised due to this medical condition and they undertook a period of intensive rehabilitation. Your parent B now requires constant and intensive family support. Since your parent B's medical condition your family's priority has been the care and support for your parent B. Sibling C and their spouse became your parent B's primary carer as they resided the closest to them. Sibling C did not have time to pursue the purchase of the property during this time. Sibling C is your parent B's primary transport and their carer. Sibling C was also your parent B'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 sibling C suffered a sudden and severe medical condition, which resulted in their death shortly after. Sibling C's spouse has inherited sibling C's interest in the property. The combined effect of these personal shattering events is that your family is still focused on the continuing support of your parent B as they require daily care. Sibling C's spouse even in their grief on their spouse's death has continued the primary responsibility for your parent B's care and transport. You and the other beneficiaries have not been focused on the finalising of your parent A's estate to dispose of it within the two year timeframe. All of the beneficiaries have just recently decided to dispose of the property. The property will be prepared, marketed and settlement on its disposal will occur prior to the end of this year.

Relevant legislative provisions: 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, when the deceased died, an interest in the property passed to you. 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 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, 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 until the end of this year.