Private ruling: Commissioner's discretion to extend two-year period
Date of advice: 9 November 2021
Published: January 2022
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise his discretion to extend the 2-year period to the settlement date under section 118-195 of the Income Tax Assessment Act 1997 for a residential property situated in Australia for you to dispose of your ownership interest in the dwelling and disregard the capital gain or loss you make on disposal? | A1: Yes.

Relevant facts and circumstances: The deceased acquired a dwelling before the introduction of CGT. The deceased passed away in late 20XX. The dwelling is a unit (one of several within a complex) and is on less than XXhectares. Prior to the deceased's death, the owners of units within the complex investigated selling as a collective. A substantial amount of research, meetings and discussions with developers regarding a potential sale of the unit complex occurred prior to the deceased passing away. Any option to proceed with a sale was not pursued due to the "vulnerable" condition of the deceased. Following the death of the deceased and immediately upon the granting of probate, the executor worked actively with the other unit owners towards achieving a collective sale. The executor expected the sale could be achieved within a two-year period given the prior efforts of the other unit owners to engage a developer. The property was originally leased for twelve months while the sale was being negotiated. The owners entered into a collective sale of the unit complex with the original developer in early 20XX, however the developer withdrew from the sale shortly before exchange of contracts. Negotiations with a second developer commenced immediately. The executor entered into a "Call Option" agreement to sell the property to a new developer (this agreement allows the developer to secure the option of first purchase of the property). A second lease agreement was in place for twelve months during the option period Neither lease agreement had an option to extend beyond the twelve-month term. These did not impede the sale of the property and the income was used to cover ongoing expenses whilst the sale process continued. The developer planned to act on their call option once Council development approval was received. The settlement was delayed due to Council requirements and Covid-19 restrictions. The developer exercised the "Call Option" and settlement on the property was completed more than 2 years after the date of death.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10 | 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: Summary: A capital gain or capital loss may be disregarded under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) where a capital gains tax event happens to a dwelling if it passed to you as an individual and a beneficiary of a deceased estate or you owned it as the trustee of the deceased estate. For a dwelling acquired by the deceased prior to 20 September 1985, 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 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 the CGT event was brought about by that person, or • your ownership interest ends within two years of the deceased's death. In your case, the dwelling was the deceased's main residence prior to death, and at that time, was not being used to produce assessable income. 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. The dwelling sale settled more than two years after the deceased's death, therefore, the alternative basis of exemption is also not satisfied. However, subsection 118-195(1) of the ITAA 1997 confers on the Commissioner 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 (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. In this case there was a delay from the date of the deceased's death until the settlement of the property. The delay was predominantly due to circumstances resulting from the original developer withdrawing from the expected sale. Negotiations with a second developer commenced immediately afterwards. A "Call Option" was entered into with the second developer. Further delays to settlement were caused by Covid-19 restrictions imposed in 2020 and the second developer's being able to comply with the local Council approval processes. They were unable to complete the purchase of the unit complex as early as was expected. The Developer exercised their Call Option and settlement took place more than 2 years after the date of death. The Commissioner accepts the circumstances relating to the delay in the sale of the property as being beyond the control of the Executor. Having considered the relevant facts, the Commissioner will apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two-year time limit. The normal capital gains tax (CGT) rules will not apply to the disposal of the property.