Private ruling: Commissioners discretion to allow two year period to dispose of inherited dwelling
Date of advice: 29 February 2016
Published: April 2016
Ruling period: Income year ending 30 June 2015.
Date scheme commenced: The scheme has commenced

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 dispose of Property A, Property B and Property C until settlement on the sale of the properties occurred? | A1: No. However, the Commissioner will exercise his discretion to extend the two year period to dispose of Property A until settlement on the sale of the property occurred. | Q2: Will the main residence exemption provisions apply to Property B? | A2: Yes. | Q3: Can the units of accommodation located on Property A and Property C be treated as a single dwelling? | A3: No.

Relevant facts and circumstances: Person A and their spouse, Person B, purchased the following properties as joint tenants before 20 September 1985: • a block of land located at Property A on which a house (the Property A house) containing a number of bedrooms and a detached structure were located; and • Property B, a block of land on which structure, gardens and swimming pool were erected. The combined land area of Property A and Property B is less than two hectares. A number of years later an extension was made to Property A. Person B passed away a number of years later and their ownership interests in Property A, Property B, and the property they had inherited from their relatives, Property C, passed to Person A. Person A's health had started to decline a number of years after Person B had passed away and they were able to continue living in the Person A house due to one of their children, Child A, being able to look after them as they lived in the house located on Property C, with some help from a veterans organisation. Person A used Property B for their specific needs and they were a member of a worldwide society, with friends from overseas and members of the society visiting their property. Person A moved out of the Property A house and into a nursing home a number of years after Person B had passed away. Person A made the absence choice to continue to treat the Property A house as their main residence after they had moved out of the house. Person A's grandchild and their partner moved into the Property A house after Person A had moved into the nursing home and continued to reside in the dwelling for around two years. They did not pay any rent and acted as caretakers in relation to the Property A house. Person A (the deceased) passed away a number of years after they had moved into the nursing home. Negotiations for the sale of Property A, Property B and Property C (the Holding) commenced within six months of the date the deceased passed away. A buyer Group (the intending purchaser) offered an amount of money for the purchase of the Holding, with the contracts being drawn up a number of months after the deceased had passed away. The intending purchaser incurred funding problems and was not able to settle the purchase. Numerous meetings and discussions had occurred prior to the termination of the contract; however the intending purchaser could not raise the necessary funds. The contract was terminated around 12 months after the deceased had passed away with the intending purchaser forfeiting their deposit. The Holding was put back on the market shortly after the contract had been terminated. The Holding was sold with the purchaser requesting a settlement period of over two months so that they could raise the necessary funds to purchase the Holding. Settlement on the disposal of the Holding occurred around 27 months after the deceased had passed away. Property C Person B's parents (the Grandparents) owned Property C which was transferred into Person B's name before 20 September 1985 after the Grandparents had passed away. Property C is located near Property A and Property B, with no dividing fence between the properties. A house was located on Property C (the Property C house) which contained a number of bedrooms, office, lounge, dining, sitting room, kitchen and laundry. For a number of years after Property C was transferred into Person B's name, the Property C house remained vacant except for when it had been used for visiting guests. One of Person A and B's child, Child A moved into the Property C house a number of years after the property had been transferred to Person B. Child A's partner, Person C, had moved into the Property C house a number of years after Child A had moved into the house. Person A used Property C as additional crops to Property A and Property B while the house had been occupied by Child A and Person C. Person A continued to develop, add and to improve the crops and spent their weekends working at the property until their activities were limited due to their health. Child A and Person C paid the electricity, gas and telephone bills for Property C and the deceased paid all of the council and water rates and insurance for Property C from the time the property had been transferred into Person B's name until Person A had passed away. Child A retired from their employment over ten years prior to the deceased passing away to look after Person A and Person B. Child A assisted the deceased with the maintenance of Property C, working in the garden, mowing and maintaining the house. Child A predeceased the deceased and Person C continued to reside in the Property C house until it was sold.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-115 | Income Tax Assessment Act 1997 Section 118-120 | Income Tax Assessment Act 1997 Section 118-130 | Income Tax Assessment Act 1997 Section 118-195

Reasons for decision: Detailed Reasoning - Commissioner's discretion to extend the two year period to dispose of an inherited dwelling: 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, such as if the settlement of a contract of sale over the inherited property falls through for reasons outside of the trustee's control, or if the will is challenged. There must not be any other factors mitigating, against exercising it. The discretion only applies to the deceased person's main residence and not to any other property. In this case, the delay in the disposal of the deceased's main residence, being Property A, was due to the original sale of contract falling through due to the intending purchaser not being able to source the necessary funds to purchase the properties, being Property B and Property C. As a result, the properties had to be put on the market again with settlement on the disposal of the properties occurring 27 months after the deceased had passed away. The actions undertaken by the Trustee were to sell the deceased's main residence within the two year period, and but for the delay due to the original contract of sale being terminated, the deceased's main residence would have been sold within the two year period after the deceased had passed away. The Commissioner's discretion extends only in relation to the disposal of the deceased's main residence. After reviewing the facts of this situation, the Commissioner accepts that it is appropriate to grant the extension that you have requested in relation to the disposal of Property A, the deceased's main residence, as the delay in the sale of that property was outside of the control of the Trustee. As a result, the two year period dispose of Property A will be extended until settlement on the disposal of the property occurred. However, the Commissioner's discretion to extend the two year period does not extend to Property B and Property C. As the Commissioner's discretion has not been granted in relation to Property A and Property B, we will consider whether there are any provisions under the capital gains tax provisions which will enable any capital gain or capital loss made on the disposal of those properties to be disregarded as follows: | Detailed Reasoning - Property B: Capital gains tax (CGT) is tax you pay when a CGT event happens to a CGT asset, such as land. The most common CGT event is CGT event A1, which occurs when you dispose of your ownership interest in a CGT asset to another party, such as when you sell the land. Main residence exemption and land adjacent to your dwelling Generally, you can ignore a capital gain or capital loss you make from a CGT event that happens to a dwelling that is your main residence. The main residence exemption can include land adjacent to the dwelling to the extent that it is used primarily for private or domestic purposes in association with the dwelling. The maximum area of land that is covered by the main residence exemption (including the area under the dwelling) must not exceed 2 hectares (section 118-120 of the ITAA 1997). If you dispose of adjacent land to the same person at the same time as you dispose of your main residence, the exemption extends to the adjacent land. However, if you dispose of adjacent land at a different time than you dispose of your main residence, the exemption does not apply to the adjacent land (section 118-165 of the ITAA 1997). Application to your situation In this case, Property B had been used for private use in conjunction with the Property A, with a garage, swimming pool and gardens located on the property. Property A and Property B were sold in the same transaction and CGT event A1 had occurred in relation to each property when they were sold. However, as Property C was sold in the same sale transaction with the deceased's main residence, and Property C had been used for private purposes in relation to the deceased's main residence, the main residence exemption will extend to the block of land. Accordingly, as the Commissioner's discretion has been exercised in relation to the deceased's main residence, Property A, it will also extend to Property C. As a result any capital gain or capital loss made on the disposal of Property C can be disregarded. | Detailed Reasoning - Property C: What is a dwelling for CGT purposes? For the purposes of the main residence exemption, a dwelling includes a unit of accommodation that is a building, or is contained in a building, and consists wholly or mainly of residential accommodation, a unit of accommodation that is a caravan, houseboat or other mobile home, and any land immediately under the unit of accommodation (section 118-115 of the ITAA 1997). A dwelling can include more than one unit of accommodation if they are used together as one place of residence or abode. Whether two or more units of accommodation are used together as one place of residence or abode for the purposes of the definition of 'dwelling' is a question of fact that depends on the particular circumstances of each case. Taxation Determination TD 1999/69 (TD 1999/69) outlines the factors relevant in considering whether units of accommodation are used together as one place of residence or abode. These include: • whether the occupants sleep, eat and live in them, • the distance between and the proximity of the units of accommodation, • whether the units are connected, • whether the units are capable of being sold separately, • the extent to which the daily activities of the occupants in the units are integrated, • how the units are shared by the occupants; and • how costs of the units are shares by the occupants. Each factor is considered equal and they are applied on a case by case basis. | Detailed Reasoning - Application to your situation: As outlined above, a dwelling can include more than one unit of accommodation if they are used as one place of residence. We have taken the following into consideration when determining whether the two units of accommodation, being the Property A house and the Property C house can be viewed as one dwelling: • For a number of years after Property C was transferred into Person B's name the Property C house had remained vacant except for when it had been used for visiting guests. We do not consider that a property and house forms part of a taxpayer's main residence if the house is used as accommodation for visiting family and friends on an irregular basis. As outlined in example 2 of TD 1999/69, it is still possible for a property to be accessed by others however this will not necessarily result in the unit not being classed as a separate dwelling; • Based on the information provided, we are unable to determine the extent to which the Property A house and the Property C house had been used by the deceased and Child A and Person C as one place of residence. Accordingly, we cannot establish that their activities in relation to the houses were shared and integrated; • Child A looked after the deceased when their health had declined however as shown in Example 2, it is possible for there to be daily contact and usage of the units of accommodation by each party and for them to still be considered separate dwellings; • The Property A house and Property B house are relatively close together. However, two units of accommodation may be attached to each other, such as a duplex described in example 2 of TD 1999/69, and still considered to be separate dwellings. The proximity of the property is not a defining factor in determining whether two units of accommodation are classed as a dwelling; • The Property A house and the Property C house are not connected; • The properties are on separate titles and could be sold separately, however they were sold together in the same sale transaction to the same purchaser; • The deceased had worked in the garden located on the properties and Child A had helped with the maintenance of Property C by working in the garden, mowing and maintaining the house. However, this does not support that they had used the Property A house and Property C house together as one residence; and • The deceased paid for the council and water rates for the Property C house from the time it had been transferred to Person B until they had passed away. Child A and Person C paid the electricity, gas and telephone bills for their use of the utilities in the house. As shown in example 4 of TD 1999/69, costs relating to a property may be borne by one party and the dwellings still continue to be classed as separate residences. After taking into consideration the facts of this situation, and the factors as outlined in TD 1999/69, it is viewed that we have not been provided with enough information to support that the Property A house and the Property C house were used functionally as one unit. Therefore, Property C is viewed as a separate property to Property A. Accordingly, Property C is not considered to be part of the deceased's main residence for CGT purposes and the Commissioner's discretion will not extend to this property. As a result, Property C will be subject to the general CGT provisions on its disposal and any capital gain or loss made on the disposal of that property will be calculated using the CGT provisions.