Private ruling: CGT exemption
Date of advice: 15 December 2015
Published: February 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

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? | A1: No.

Relevant facts and circumstances: One of the main assets of the estate of the deceased was their principal residence. The deceased acquired the property prior to 20 September 1985. The property has never been used to produce assessable income. Certain family members are the beneficiaries of the estate. No one had a right to occupy the house under the will. However, a decision was made to allow one of the beneficiaries to stay in the house for a period but the house would be sold within the two years allowed. Approximately 18 months after the deceased's death, the beneficiaries decided to start the process of placing the property on the market so that it would be sold within the two years allowed. Shortly afterwards the property was damaged by an unforeseen event and as a result was not in a condition to be sold until repairs were completed. The repairs to the property were not completed within 2 years of the deceased's death. When the repairs to the property were almost completed a real estate agent was engaged to put the property on the market. Shortly after the repairs were completed, settlement for the sale of the property took place.

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

Reasons for decision: Summary: The Commissioner will not exercise his discretion to allow the executor a period longer than two years to dispose of the property for the purposes of section 118-195 of the ITAA 1997. In making this decision the Commissioner acknowledges the damage caused by an unforeseen event; however allowing a family member to occupy the property for a period of 18 months which was not a condition of the will was the most significant factor in delaying the sale of the property beyond the two year period allowed by section 118-195 of the ITAA 1997. Accordingly, the executor cannot disregard any capital gain or loss that arises as a result of the disposal of the property. | Detailed Reasoning - Main residence exemption: Subsection 118-195(1) of the ITAA 1997 indicates a capital gain or capital loss you make from a capital gains tax (CGT) event that happens in relation to a dwelling, or your ownership interest in it, is disregarded if: (a) you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and (b) at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied. | Detailed Reasoning - And also one of these items: 1 the deceased *acquired the *ownership interest on or after 20 September 1985 and the *dwelling was the deceased's main residence just before the deceased's death and was not then being used for the *purpose of producing assessable income your *ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner ........... 2 the deceased *acquired the *ownership interest before 20 September 1985 the *dwelling was, from the deceased's death until your *ownership interest ends, the main residence of one or more of: (a) the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or (b) an individual who had a right to occupy the dwelling under the deceased's will; or (c) if the *CGT event was brought about by the individual to whom the *ownership interest *passed as a beneficiary - that individual In this case, a review of the information provided indicates the property was not used to produce assessable income and it was the deceased's main residence prior to his death. Further none of the items noted in column three at (a), (b) and (c) apply in your circumstances. You will only be able to disregard the capital gain from the sale of the property if the Commissioner extends the time period in which you can dispose of the property. The following is a non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion to extend the time period in which you can dispose of the property: • 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 (eg 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. • that in considering whether or not to exercise this discretion, the Commissioner is expected to consider the period the trustee held the ownership interest in the dwelling and whether and to what extent the dwelling is used to produce assessable income during the trustee's ownership of the dwelling. In considering the present case, the Commissioner notes the following: • The executor was clearly conscious of the need to sell the property within two years of the date of death if section 118-195 of the ITAA 1997 was to be met. Despite that awareness, a family member occupied the property for a period of 18 months which was not a condition of the will and as result delayed the process of placing the property on the market for sale. This left the executor with only about six months to dispose of the property within the two year period. This indicates that the property could have been disposed of within, or closer to, the two year period allowed by section 118-195 of the ITAA 1997 had it been placed on the market closer to the date of the deceased's death. The Commissioner acknowledges the damage caused by an unforeseen event; however, the most significant factor for the delay in placing the property on the market was the personal choice to allow the family member to occupy the property and not the subsequent event causing the property damage. • There was no challenge to the will or to the ownership of the property. • There no information to indicate there was anything particularly complex about the administration of the estate. • There were no unforeseen or serious personal circumstances arising during the two year period after death that would have prevented the trustee from administering the estate. Having considered the relevant facts, the Commissioner will not apply his discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the two year time limit. Accordingly, the executor cannot disregard any capital gain or loss that arises as a result of the disposal of the property.