Private ruling: Capital gains tax – main residence exemption
Date of advice: 14 December 2017
Published: May 2018
Ruling period: Year ending 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) and allow an extension of time to the two year period? | A1: Yes Having considered your circumstances and the relevant factors, the Commissioner is able to apply his discretion under subsection 118-195(1) of the ITAA 1997, and allow an extension of time. Further information on the relevant factors and inheriting a dwelling generally can be found on our website ato.gov.au and entering Quick Code QC52250 into the search bar at the top right of the page.

Relevant facts and circumstances: The deceased passed away in November 20XX. There were X beneficiaries to the estate in which one of the beneficiaries was also the executor. The deceased acquired a property prior to 20 September 1985 (property A). The deceased obtained an owner builder licence and commenced development on the land of property A after the development application was approved in 19XX. The development was to create dual occupancy by adding another dwelling on the land under the same title. The second dwelling (property B), was established after 20 September 1985 and was occupied by and was the main residence of the deceased. Property A was leased to derive income during the deceased’s ownership period and the tenants vacated at the time their lease ended after the deceased’s death in 20XX. The grant of probate occurred in August 20XX. Under the Relevant State law properties which are developed using an owner builder licence, require the vendor provide a statutory warranty against any defects to the property for seven years, from the date the accommodation status is granted. There were substantial delays in putting the property on the market as the council reported a number of defects to property A and property B. The executor took action to remedy the defects in order to sell the property and reduce the risk of the estate being sued as this would cause financial impacts to the beneficiaries. The executor committed to financing the repairs to remedy the defects as there were no available funds in the estate to do so. There were difficulties in obtaining a builder who was able to take on the whole job as it involved accepting liability for work of an unknown standard and specification. In 20XX, as an option to reduce the liability to the estate, the executor and one of the beneficiaries considered taking ownership of property A and property B to complete the works themselves and hold onto the property until the owner builder licence had expired. The executor engaged tradesman in the relevant areas including electrical, roofing and waterproofing to rectify the defects and moved into property A to oversee the works being completed. The executor found difficulties managing all the issues on the properties due to living in another town and the travel time involved. Due to these reasons the title of the property was kept in the name of the estate. In 20XX, the council inspected the property and provided a list of additional defects to be addressed. A formal valuation was obtained by the executor in late 20XX to determine a fair price of the property. However the valuation was “as if completed” because it was too difficult to accurately factor in the defects of the property. The owner builder liability was removed in early 20XX by the relevant state Department of Fair Trading although this was unknown to the executor until early in 20XX. The executor, without knowing the owner builder liability was removed, and in an attempt to remedy the defects for the property to be sold without liability to the estate, hired an architect in mid 20XX. The architect agreed to find a builder to rectify the defects and was to liaise with council. This process involved delays with council, delays with the architect and delays due to the passing of time since construction approval. The title of the property was transferred into the names of all X beneficiaries, in equal shares as it became known that the owner builder liability was removed. The works undertaken at property A and property B were solely to remedy defects on the properties only and not to increase the saleable value of the property. A decision was made for the executor who was also a beneficiary and one of the other beneficiaries to sell their inherited shares in property A and property B to the remaining X beneficiaries. Settlement of this transaction will occur prior to early 20XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 118-195(1)