Private ruling: Capital Gains Tax – Main Residence Exemption
Date of advice: 20 November 2017
Published: April 2018
Ruling period: Year ended 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 to XX July 20XX? | A1: No | Q2: Is a partial main residence exemption allowable under section 118-200 of the ITAA 1997 with respect to the disposal of the property? | A2: Yes | Q3: Will the Commissioner exercise his discretion under subsection 118-200(3) of the ITAA 1997 and allow an extension of time to the two year period to XX July 20XX? | A3: Yes

Relevant facts and circumstances: The deceased died in early-mid 20XX. The deceased purchased a property in late 19XX. The deceased treated the property as their main residence from the time of purchase until October 20XX. From this point forward the deceased treated their spouse’s property as their main residence until they passed away. For the period that the deceased lived at their spouse’s property, their relation (Individual A) resided at the property with their family. During this time period, Individual A did not pay any rent to live in the property. The executors of the Estate allowed Individual A and their family to continue residing at the property until they could arrange the sale of the property and to allow them to find other accommodation. Individual A did not have the right to occupy the property under the Will. Individual A was required to pay weekly payments into a trust account to cover the cost of council rates, water bill and insurance. Individual A committed to paying the weekly payments for a short amount of time and then refused to pay any further payments. At this point in time, the executors of the Estate decided that the property needed to be sold. The executors asked Individual A to allow a real estate agent to appraise the property, which Individual A refused the agent and executors entry to the property. In November 20XX a Form 11 Notice to leave was issued to Individual A to vacate the property in January 20XX. Individual A refused to leave the property or allow anyone access. A solicitor was appointed to help the executors remove Individual A from the property. Individual A was issued with a letter from the solicitor advising that the executors were applying for a court order to have them removed from the property if they didn’t move out. Once again Individual A refused to move out and as a result the executors progressed with the court order. Individual A and family vacated the property in May 20XX, one day before the court hearing. The property was then listed for sale. The property was sold and settlement occurred in July 20XX. The executors did not obtain probate for the estate. They received advice from their solicitor that it was not required due to the minimal assets in the Estate.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-195 | Income Tax Assessment Act 1997 Section 118-200 | Income Tax Assessment Act 1997 Subsection 118-200(1) | Income Tax Assessment Act 1997 Subsection 118-200(3)

Reasons for decision: Summary: Having considered your circumstances and the relevant factors, you are entitled to a partial main residence exemption under section 118-200 of the ITAA 1997. The Commissioner is able to apply his discretion under subsection 118-200(3) of the ITAA 1997 and allow an extension of the two year period to XX July 20XX. | Detailed Reasoning - Full main residence exemption: Section 118-195 of the ITAA 1997 states that a capital gain or loss is disregarded from the disposal of a dwelling acquired from a deceased estate if the following conditions are satisfied: ● the deceased acquired their ownership in the dwelling on or after 20 September 1985 ● the dwelling was the deceased’s main residence just before their death ● the deceased was not using the dwelling to produce assessable income ● your ownership interest in the property ends within two years of the deceased’s death or within a longer time period allowed by the Commissioner. | Detailed Reasoning - Partial main residence exemption: However, where the conditions of section 118-195 of the ITAA 1997 have not been met, section 118-200 of the ITAA 1997 may provide a partial exemption for deceased estate dwellings. You calculate your capital gain or capital loss using the following formula: Capital gain or capital loss amount x Non-main residence days Total days The capital gain or capital loss amount is the proceeds from the sale of the property less the cost base for the property. If the deceased acquired the asset on or after 20 September 1985, the first element of your cost base is taken to be the deceased’s cost base for the asset on the day they died. This is generally the amount of money the deceased paid to purchase the asset. Where the deceased acquired the property on or after 20 September 1985, non-main residence days are the number of days in the entire ownership period where the dwelling was not their main residence. Where the deceased acquired the property on or after 20 September 1985, total days are the number of days in the entire ownership period. This is from when the deceased acquired the property until you disposed of the property. However, Subsection 118-200(3) of the ITAA 1997 allows the period between the deceased’s passing and disposal of the property to be disregarded if you sold the property within two years of the deceased’s passing or you are granted an extension of the two year period. | Detailed Reasoning - Extension of the two year period: Subsection 118-200(3) of the ITAA 1997 allows the Commissioner to apply his discretion to extend the two year exemption period. 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 ● settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for reasons outside the beneficiary or trustee's control. | Detailed Reasoning - Application to your circumstances: The exemption under section 118-195 of the ITAA 1997 is not available as the property was not the deceased’s main residence just before their death. Therefore, you are only entitled to a partial capital gains tax (CGT) exemption for the property under section 118-200 of the ITAA 1997. In regards to an extension of the two year time period, your delay in disposing of the property was due to the deceased’s relation refusing to vacate the property for over two years after your parent’s passing. Considering these circumstances, the commissioner is able to apply his discretion under subsection 118-200(3) of the ITAA 1997 and allow an extension of time until XX July 20XX. This extension of the two year period allows you to ignore the time period between the deceased’s passing and settlement of the property in the capital gain calculation if it is more favourable for you to do so.