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: No.

Relevant facts and circumstances: Your relative and their spouse acquired a property prior to 20 September 1985. Upon the death of your relative, your relative's spouse continued to reside there until their death more than two years ago. The date of probate was three months after your relative's date of death. You used all available resources at your disposal to ensure that the final years of their life were familiar and comfortable in the surroundings of their family home. Under your relative's will you were bequeathed the property. The task of sorting the effects and affairs of your relative's lifetime has been quite stressful and emotional for you and your child as you were all extremely close. The task of clearing out your relative's effect had to be conducted whilst trying to maintain a family and a self-employed lifestyle in less than ideal financial times. It was an intention and certainly a wish of family members to retain the property in its entirety but you have come to a realisation that you must part with at least some of it. You have established that you do not need to realise the whole asset to provide for your family but it is possible to subdivide the land to maintain your family wishes and ties. The dwelling is an old two bedroom brick clad former weatherboard house that must be demolished as the dwelling sits in the middle of the lot. For a number of months the property has been rented out to help offset the expenses of rates, taxes and charges whilst you and your my family came to the above decision. You have been advised the estimated delays in the approval processes through Local Government and the State Planning Commission for the demolition, subdivision and disposal with a conservative timeline is nine months. You did not have the capacity to overcome the strength of emotions of your family in the unexpected pressures and impact of the loss of your loved great ant to have quickened this process to fit within the current two year period.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | 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, the property passed to you. The property was the deceased's main residence prior to death, and at that time, was 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. You found the task of sorting the effects and affairs of your relative was quite stressful and emotional for you and your family. You were also undecided as to what to do with the property as your family members wanted to retain the property in its entirety. You have now made your decision to retain half of the property by demolishing the dwelling and disposing of half of property. 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. We appreciate that it has been extremely stressful for you and your family. However, having considered the relevant facts, the Commissioner is not able to apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit. The normal capital gains tax (CGT) rules will apply to the disposal of the property. | Detailed Reasoning - CGT: The most common CGT event, CGT event A1, occurs when you dispose of an asset to another entity. The time of the event is when you enter into the contract for disposal of it, or if there is no contract when the change of ownership occurs. Information on how CGT applies is available on our website - www.ato.gov.au.