Private ruling: Main residence exemption
Published: December 2014
Ruling period: Income year ended 30 June 2011
Date scheme commenced: August 2002

Ruling: Q1: Will the Commissioner exercise discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you an extension of the two year period to access a full main residence exemption? | A1: Yes, the extension has been granted until the X

Relevant facts and circumstances: Your parent purchased a property on X. From that time until her death in X it was her principle place of residence. In her will your mother left the property to you and your two siblings, but gave a life tenancy in the property to X who was also a trustee of the estate. On X, X called and advised that he/she wanted to release himself/herself from the life tenancy as he/she had moved on to a new relationship. He/she advised that he/she had abandoned the property approximately 12 months before and that he/she no longer wished to reside in the property or be responsible for paying the required items under the will. X advised that he/she would not just walk away and that he/she would not hand over the keys unless you compensated him/her. He/she mentioned that he/she would like to be reimbursed for paying for your parent's funeral expenses and for replacing the carpet when he/she vacated the unit. You spoke to a lawyer who drew up a deed, for the agreed sum of $X. Which X signed on the X. The deed stated the amount paid was a settlement. The lawyer advised this was the best course of action to prevent X from making further claims against the estate. The funds from this settlement came from the private account of one of the remainder owners. The remainder owners have agreed that this payment to the life tenant should be reimbursed to that remainder owner prior to distribution, once the property was sold. On X you first approached a real estate agent about selling the property. On X you engaged a real estate agent to sell the property. On X you exchanged contracts for the sale of the property. This contract fell through as the potential buyers could not raise funds for settlement. On X you engaged a new real estate agent to sell the property. You entered into a contract to sell the property on the X, which settled on the X.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-195

Reasons for decision: Summary: A capital gain or capital loss is disregarded under section 118-195 of the ITAA 1997 where a CGT 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 dependant 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. 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. In your circumstances the property settled outside the two year period from the deceased estate. While another party had a life interest in the property, there was a significant period between settlement of the property and when the life interest was released under the deed. 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. We note in your circumstances that the property since the deceased purchased it has been used exclusively as a residence, firstly by the deceased and then a party with a life interest under the will. Further that once that party released their life interest you have done all in your power to sell the property. 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.