Private ruling: Deceased Estate - Main residence exemption 2 year extension rule
Published: May 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: The deceased acquired a property after 20 September 1985 and lived in it as their main residence. The deceased died over two years ago. The deceased was an elderly, lived alone at the property for many years and had accumulated many personal belongings. You and your sibling inherited the property. The administration of the estate was delayed by the legal practitioner handling the matter. The title of the property passed to you approximately a year after the death of the deceased. When the title was transferred, you and your sibling took some months going through the process of cleaning up the site, being mindful of the Will terms and family interest. When the title was transferred you and your sibling consulted with real estate agents and engaged one to appraise the sale value of the property to expedite disposal. You received little interest to purchase the property from when it was marketed. A year later, you considered changing agents to improve the chance of sale. Your agent approached you to rent to a tenant who had a view to ultimately purchase the property - subject to certain council approvals. You entered into a formal lease to let the property late 20XX. The tenants were unable to progress their negotiation with the Council. Two separate offers to purchase were later made. You signed a contract for sale and the settlement date was X. The contract amount was for an amount at the lower end of the market appraisal.

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 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. 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. In your case, the settlement of contract of sale over the dwelling was unexpectedly delayed for reasons outside your control. Although you entered into a lease to rent the property, the lease terms provided a purchase option and you flexibility to sell the property to third parties. 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.