Private ruling: Capital gains tax - deceased estate - Commissioner's discretion to extend the two year period - main residence exemption
Date of advice: 1 November 2018
Published: January 2019
Ruling period: Financial 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: No

Relevant facts and circumstances: The deceased died without a Will. This caused a delay in letters of administration which was granted to the siblings. The dwelling was the deceased’s main residence at the time of their death. No market valuation was obtained on the dwelling at the date of death. There was a protracted legal dispute between sibling beneficiaries. A sibling, who had resided in the dwelling with the deceased, sought a life tenancy over the dwelling. During negotiations, the sibling continued to reside in the dwelling. Proceedings were also delayed by the loss of the property’s title by the family’s solicitor. In Court the Terms of Settlement sought by a sibling were agreed to through mediation to settle the respective claims. An agreement was reached to settle the application between the administrator’s. The administrators permitted a sibling to reside at the dwelling free of rent. The sibling will permit tradesmen appointed by the remaining administrators to access the dwelling to effect any renovations or repair to maximize the ultimate sale price of the dwelling. The administrators shall place the dwelling on the open market for sale. The sibling vacated the dwelling later than agreed. A contractor engaged to clean and repair the dwelling was unable to commence until early the following year. The following work was carried out at the dwelling prior to being placed on the market for sale: painting, rubbish removal, cleaning, sanding and polishing floors, tiling and electrical work. The dwelling was placed on the market immediately upon completion of the works. The dwelling was sold. The purchaser leased the dwelling from the Estate until settlement occurred 12 months later.

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

Reasons for decision: Summary: 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. 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 property 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 ● the settlement of a contract of sale over the property is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee’s control. These examples are not exhaustive, but provide guidance on what factors the Commissioner would consider reasonable to exercise his discretion to extend the two year period to dispose of an inherited property. In exercising the discretion the Commissioner will also take into account how long the trustee or beneficiary held the ownership interest in the dwelling and the extent to which the dwelling has been used for other purposes, such as: ● producing assessable income ● a main residence for a beneficiary or associates of the beneficiaries ● renovations or other activities designed to increase the sale price, or ● waiting for the property market to improve. Whether the Commissioner will exercise his discretion under subsection 118-195(1) of the ITAA 1997 will depend on the facts of each case. | Detailed Reasoning - Application to your situation: In this case the Commissioner has decided not to exercise his power to extend the two year period available to the deceased estate to dispose of the inherited property for the purposes of section 118-195 of the ITAA 1997. We have taken the following into consideration when making our decision: ● The deceased did not have a will thus there was no provisions for a life interest or life tenancy agreement. The administration of the deceased's estate was delayed due to the actions of one of the beneficiaries, seeking a life tenancy in the dwelling. ● The Commissioner expects an administrator to undertake their duties to ensure that the estate is administered within an appropriate period. ● The administrator’s allowed a beneficiary to continue to reside in the dwelling after the legal action was resolved. This was a choice the administrator’s had made. ● The purchaser offered significantly more than other prospective purchasers and was provided a 12 month settlement period. ● During the 12 month settlement period the purchaser leased the dwelling from the administrators. ● As a result of choices and actions, disposal of the dwelling did not occur until two years after an agreement was reached. | Detailed Reasoning - Conclusion:: It is clear that the Commissioner's discretion is meant to be limited to situations where the owner is effectively prevented from selling the dwelling. The intention of the two year period is to allow the orderly and timely sale of deceased estate property. After considering the facts of this situation, while we accept that there had been issues arising as a result of a beneficiary claiming a life tenancy on the dwelling, there were no legal or physical impediments that prevented the disposal of the dwelling once the matter of life tenancy was resolved. It was ultimately the decision of the administrators of the deceased estate, to allow a beneficiary to continue to reside in the dwelling, and to not sell it as soon as practicable. We also appreciate the situation in conducting repair and renovation work to the dwelling before listing it for sale; however the situation is of a different nature to which the Commissioner can exercise his discretion. The repairs and renovations to the dwelling have delayed the sale of the dwelling and this was not an impediment to the sale of the dwelling, but may have affected the sale price you would receive. Consideration has also been given to the dwelling not being listed for sale as soon as practically possible after those circumstances were resolved. The delay in the disposal of the dwelling was also contributed to by the actions and choices of the administrator’s in control of the dwelling in maximising the sale price of the dwelling. After taking into consideration the facts of your situation, the Commissioner has determined that he will not exercise his discretion to extend the two year period to dispose of the ownership interest in the dwelling. You cannot rely on circumstances being outside of your control in delaying the sale when there was a decision to repair and renovate the dwelling along with a 12 month settlement period, which was entirely within the control of the administrator’s. Having considered the relevant facts, the Commissioner will not apply his discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the two year time limit.