Private ruling: The Commissioner’s discretion to extend the two year period for a main residence exemption on a property inherited through a deceased estate.
Date of advice: 17 May 2018
Published: July 2018
Ruling period: The year ending 30 June 20XX
Date scheme commenced: December 20XX

Ruling: Q1: Are you entitled under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) to claim a main residence CGT exemption on the disposal of your ownership interest in the Property? | A1: No. | Q2: Will the Commissioner exercise his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension of time for the disposal of your ownership interest in the Property? | A2: No. | Q3: Does section 118-200 of the ITAA 1997 apply to the disposal of your ownership interest the Property? | A3: Yes. | Q4: Is the first element of your cost base the market value of the dwelling as at the deceased’s date of death for your ownership interest in the Property under section 128-15 of the ITAA 1997? | A4: Yes. | Q5: Will the market value substitution rules in subsection 116-30(2) of the ITAA 1997 apply to the disposal of your ownership interest in the Property? | A5: Yes.

Relevant facts and circumstances: The Deceased purchased the Property prior to 20 September 1985. The property was the deceased’s main residence. The deceased was moved into a nursing home in 20XX. The Property was rented out in in 20XX. The deceased passed away. The Property continued to be rented out through the Estate of the deceased until 20XX. Probate was granted and the property was transferred in equal shares to the beneficiaries. You and the other beneficiary had the Property professionally valued in 20XX. The property was vacant for the period 20XX to 20XX. Repairs and maintenance were carried out during this time. The Property was rented for the period 20XX to 20XX. The Property was then occupied by the other beneficiary. You had the Property professionally valued in 20XX. You signed a contract of sale between yourself and your relative to dispose of your ownership interest in the Property for market value. You received less than market value in capital proceeds.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 128-15 | Income Tax Assessment Act 1997 section 116-30 | Income Tax Assessment Act 1997 section 118-110 | Income Tax Assessment Act 1997 section 118-195 | Income Tax Assessment Act 1997 section 118-200

Reasons for decision: Detailed Reasoning - Detailed reasoning: Section 118-110 of the ITAA 1997 allows for a capital gain or capital loss you make from disposing of your ownership interest in a property to be disregarded if you are an individual and the property is your main residence. However, this section is not applicable if the dwelling is inherited from a deceased estate. In this instance, you are not entitled to claim the main residence exemption under section 118-110 of the ITAA 1997 as the Property was passed to you as a beneficiary of a deceased Estate. Further, the Property was never treated as your main residence for CGT purposes. | Detailed Reasoning - Detailed reasoning: Subsection 118-195(1) of the ITAA 1997 allows for Capital Gains Tax to be disregarded where the deceased acquired the property before 20 September 1985, and one of the following criteria is met: ● Your ownership interest ends within 2 years of the deceased’s death, or ● The property was the main residence for one of the following from the deceased’s death until your ownership interest in the property ended: ● The spouse of the deceased, or ● An individual with the right to occupy under the deceased’s will, or ● Yourself When Subsection 118-195(1) of the ITAA 1997 is applied to your specific circumstances, your ownership interest did not end within 2 years of the deceased’s death. Additionally, the property was not occupied by you, the spouse of the deceased or an individual with the right to occupy from the deceased’s death until your ownership interest in the Property ended. You have asked for the commissioner’s digression to extend the 2 year period. Under Subsection 118-195(1) of the ITAA 1997, the Commissioner can allow a longer period of time if the delay of sale is due to circumstances outside of your control, including but not limited to: ● 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) ● settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary's or trustee’s control You have not at this time advised us of any circumstances or relevant factors which would have delayed the sale of the Property or you occupying the property. The Commissioner also considers that the Property was used for several years to produce assessable income after probate was granted. Having considered your circumstances and the relevant factors, the Commissioner is unable to apply his discretion and will not allow an extension of time under subsection 118-195(1) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 118-200 of the ITAA 1997 allows for a partial exemption for deceased estate dwellings if you do not meet the criteria set out under section 118-195 of the ITAA 1997 and you are an individual and your ownership interest in a dwelling passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate. You calculate your capital gain or capital loss using the formula: Capital Gain or Capital Loss amount × Non-main residence days Total days Non-main residence days is the sum of the number of days in the period from the death until your ownership interest ends when the Property was not the main residence for the deceased’s spouse, an individual with the right to occupy or yourself. Total days is the number of days in the period from the death until your ownership interest ends. | Detailed Reasoning - Detailed reasoning: Subsection 128-15(4) of the ITAA 1997 sets out the first element of the cost base when calculating CGT for the disposal of your ownership interest in an inherited property, which the deceased acquired prior to 20 September 1985. The section allows for the first element of the cost base to be substituted with the market value of the dwelling as of the date of the deceased’s death, rather than the value of the dwelling at the time the deceased acquired the dwelling. In your circumstances, this means the first element of your cost base would be the market value of the Property at the date the deceased passed away. | Detailed Reasoning - Detailed reasoning: Subsection 116-30(2) of the ITAA 1997 allows for market value substitution when capital proceeds are more or less than the market value of the asset. Further, the market value substitution rule should be applied when you and the entity that acquired the asset from you did not deal with each other at arm’s length in connection with the sale of the asset. The market value is determined at the same time as the sale of the asset. You are said to be dealing at arm’s length with someone if each party acts independently and neither party exercises influence or control over the other in connection with the transaction. The law looks at not only the relationship between the parties, but also the quality of the bargaining between them. In your circumstance, the contract price reflected the market value of the Property; however the capital proceeds you received were less than the contract price. We do not consider that you’ve acted in an arm’s length manner. This is evidenced in the family relationship between you and the purchaser and the difference in the market value of the property and the agreed sale price. Therefore, you would use the market value apportioned to your ownership interest in the Property at the time of sale as the value of the sale to calculate CGT gain or loss; rather than capital proceeds you received for the sale.