Private ruling: Commissioner's discretion to extend two year time limit to dispose of a dwelling
Date of advice: 31 October 2017
Published: March 2018
Ruling period: 1 July 2017 to 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the dwelling on the property and allow an extension of time? | A1: Yes

Relevant facts and circumstances: The deceased bought a house that was the main residence of the deceased up until their death. The house was also the main residence of one of the deceased’s beneficiaries. The deceased married a new partner some years later. The deceased and their partner purchased a property as joint tenants for investment purposes (the investment). The deceased mortgaged the house to borrow money to pay for the investment property. To protect their relations interest in the house, the deceased entered into a binding financial agreement (BFA) with the partner over the investment, stating that if the deceased died before the partner and there was still a debt over the house, the investment would be sold to clear the debts. On a date after the breakdown of the marriage the deceased died. At the time of death the house, the investment property, and another property owned by the partner were security for the loan. An amount remained owing on the loan. The house was at that time worth a similar amount to the amount owing. The deceased’s estate had three relatives as beneficiaries, in equal shares. One beneficiary was named as executor of the estate in the Will. After the death of the deceased, rather than acting in accordance with the BFA and selling the investment to clear the debt, the partner registered the title of the investment in their own name. The bank refused to release details of the mortgage to the executor of the estate, as they were not registered on the mortgage or the investment property. On a date the executor went to a solicitor to get advice on managing the estate and enforcing the BFA. On a date the partner indicated they did not intend to comply with the BFA. Legal advice was that the executor’s only recourse would be to apply to the Supreme Court to enforce the agreement. The executor received advice that, absent to an agreement to the contrary, if the house was sold the bank would demand the entire debt be repaid. This would then bring to an end the basis for the BFA, and consequently prevent any attempt to enforce the terms of the BFA. The beneficiaries determined to apply for the deceased’s superannuation to fund the proceedings before embarking on court action. On advice, they opted to wait till a date to apply for the superannuation for a death benefits notice to expire so the funds would not be given to the partner. The executor made the first approach to the deceased’s bank on a date, in an attempt to find out how much was owing on the property, but the bank stated they would not communicate with the executor until the Will and death certificate were given to the bank. Probate was granted in on a date. Even after these were supplied, the bank would not communicate. The executor engaged their solicitor to approach the bank, but the bank still refused to communicate as they wanted written permission from both account holders, and the partner would not provide this. While living in the property, the executor intended to sell the house and distribute the funds equally to the three beneficiaries. However without the details of the debts and with the bank’s mortgage on the title preventing the transfer of the house from the estate, the property could not be sold. The executor commenced legal proceedings in the Family Court to enforce the BFA and clear the title to the house. After the court action began, the partner on several occasions refused to make outstanding payments on the loans, causing the bank to threaten to force the sale of the house to clear the debts. The beneficiaries were forced to make payments on the loans to the bank to allow the court case to enforce the BFA to continue. The executor attempted several times to settle the matter out of court, but the partner was unwilling to negotiate. Eventually, the court ordered the investment property to be sold and the funds be paid to reduce the debt owing on the house. Although the court ruled that the BFA was legally binding, the partner appealed the decision and the order was stayed pending another court hearing. The beneficiaries made another attempt to settle the dispute with the partner. The partner eventually relented, and settlement out of court occurred. The executor agreed to make a payment of an amount towards the debt. As part of the settlement, the bank discharged the mortgage with clear title. The executor immediately appointed a real estate agent to sell the property. Contracts were exchanged on a date in very soon afterwards, and settlement also following quickly. The property was sold directly from the estate and never transferred to the beneficiaries. There is no entitlement to a main residence exemption for the beneficiary who continued to treat the house as their main residence from the time of death. Final legal costs were a relatively large amount.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10, | Income Tax Assessment Act 1997 Subsection 118-130(3) and | Income Tax Assessment Act 1997 Section 118-195.

Reasons for decision: Summary: The Commissioner will exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time until DDMMYY | Detailed Reasoning - Detailed reasoning: 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, the legal dispute prevented the property from being sold until court proceedings had concluded. As a result of these delays, the sale of the property could not be completed until after the two year deadline expired. As soon as the estate had clear title to the property it was placed on the market, and quickly sold. The Commissioner accepts that in these particular circumstances it is appropriate to grant the extension that you have requested.