Private ruling: Capital gains tax
Date of advice: 5 August 2022
Published: November 2022
Ruling period: Year ended 30 June 2022
Date scheme commenced: 1 July 2021

Ruling: Q1: Will the commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the two-year capital gains tax (CGT) exemption to dispose of the property? | A1: No.

Relevant facts and circumstances: The deceased passed away several years ago. Probate was granted the same year. The property was purchased by the deceased several decades ago. The main residence on the property was constructed prior to 1985. The property was the deceased main residence for the whole of their ownership period. The property was never used to produce assessable income. Several years ago the boundaries on the property were re-aligned and sold to a neighbouring property. A condition of the subdivision of the home was that the title where the main residence resides is amalgamated with a neighbouring parcel of land. Subdivision was significantly delayed due to the planning provision that a reserve be acquired from the custodian of the land. Subdivision was only recently granted due to waiting on the custodian of the land for the plans and permits. This has been in progress since before the death of the deceased. Subdivision was recently granted and the family immediately put this on the market and sold it as per the contract of sale and settled a few months later. The home title was on an area less than 2 hectares. The custodian of the land had no title for the land, and it had not been surveyed. When the original sub-division was done the paperwork was never done for the land. A number of decades ago the custodian had to chase it all up and get a title for this parcel of land which took some time. You believe you could not sell the family home as you were told by the custodian that if you sold it prior to the availability of the land then the new purchaser would not have a right to purchase the that parcel of land. The neighbouring property owners would have the first option to buy it. You were advised that the property would be very difficult to sell.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-110

Reasons for decision: Summary: The main residence exemption in section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to disregard a capital gain or capital loss a taxpayer makes from a capital gains tax (CGT) event that happens to a dwelling that is their main residence. If a taxpayer inherits an ownership interest, subsection 118-195(1) of the ITAA 1997 applies so that any capital gain or capital loss they make from a CGT event that happens in relation to a dwelling or their ownership interest in a dwelling is disregarded if: • They are an individual and the interest passed to them as a beneficiary in a deceased estate, or they owned it as the trustee of a deceased estate; and • 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 and; • Their ownership interest ends within two years of the deceased's death, or within a longer period allowed by the Commissioner Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example: • 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). • Settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control. Factors that would weigh against the granting of the discretion include: • Waiting for the property market to pick up before selling the dwelling. • Property used to earn assessable income. • Unexplained periods of inactivity by the executor in attending to the administration of the estate. The above examples are not exhaustive. In addition, once any circumstances preventing the sale of the Property have been resolved, the Property needs to be placed on the market as soon as possible to enable its disposal. Application to your circumstances: The delay in selling the property was due to the estate acquiring a parcel of land from a third party. This land was pursued as you were told that the property would be difficult to sell without the additional land. The neighbouring property had the first option to purchase the property. The parcel of land appears to make the purchase of the property more attractive but it certainly did not prevent the property from being placed on the market without the additional land being a part of the sale. We consider the delay in disposing of the property was predominantly caused by the taxpayer waiting for the land to become available, which would attract more prospective buyer and a higher selling price. In this regard, we consider that the delay was not outside the control of the taxpayer. It is for the above reasons that you do not meet the requirements for the Commissioner to extend the 2 year time period as the property could have been sold at an earlier stage. The Commissioner will not be exercising his discretion to extend the 2 year period for you to dispose of the property. Therefore, any capital gain made on the property from the date the deceased passed away until the property was disposed of will be subject to tax. You are also entitled to the 50% CGT discount in relation to the property.