Private ruling: Capital gains tax
Date of advice: 15 September 2022
Published: December 2022
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the two-year capital gains tax (CGT) exemption to dispose of the property? | A1: No

Relevant facts and circumstances: The deceased passed away a few years ago. The property was purchased by the deceased several decades ago. The property was the deceased's main residence for the whole of their ownership period. The property was less than 2 hectares. Probate was granted a few years after the date of death. The property was used to derive rental income after the deceased passed away. The delays in selling the property were as follows: • the property was rented out to tenants as there were concerns about the property being left vacant • there were concerns about the downturn in the market due to the COVID pandemic • tenants leased the property for several months following which the lease was changed from an annual lease to a month-by-month lease • with the lease arrangements then being moved to a month-by-month lease • probate was granted • there were multiple lockdowns due to the pandemic • an individual with the right to reside in a property owned by the deceased passed away • this property became vacant as part of the estate • the X properties of the estate including the property resided in by the deceased were settled later in the year and early in the following year, several years after date of death

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

Reasons for decision: Summary: The main residence exemption in section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to disregard a capital gain or capital loss a taxpayer makes from a capital gains tax (CGT) event that happens to a dwelling that is their main residence. If a taxpayer inherits an ownership interest, subsection 118-195(1) of the ITAA 1997 applies so that any capital gain or capital loss they make from a CGT event that happens in relation to a dwelling or their ownership interest in a dwelling is disregarded if: • They are an individual and the interest passed to them as a beneficiary in a deceased estate, or they owned it as the trustee of a deceased estate; and • The deceased acquired the ownership interest on or after 20 September 1985 and the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income; and • Their ownership interest ends within two years of the deceased's death, or within a longer period allowed by the Commissioner Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example: • 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 or trustee's control. Factors that would weigh against the granting of the discretion include: • Waiting for the property market to pick up before selling the dwelling. • Property used to earn assessable income. • Unexplained periods of inactivity by the executor in attending to the administration of the estate. The above examples are not exhaustive. In addition, once any circumstances preventing the sale of the Property have been resolved, the Property needs to be placed on the market as soon as possible to enable its disposal. | Detailed Reasoning - Application to your circumstances: The delay in selling the property situated was predominantly due to the property being rented out from 1 November 20XX. The property was prepared to a state of satisfaction to be able to be rented to tenants but was not placed on the market as soon as practicable. The rental of the property took priority over sale of the property. There were gaps of inactivity in relation to the property from the date of the deceased's death until the beginning of the first lock down period. The period from the end of the second lockdown to the start of the third was almost X months, with no attempt to sell the property during this time. For several months no action was taken to sell the property and in fact attention was given to a second dwelling that had been included in the estate. The periods of inactivity resulted in significant delays in putting the property on the market and the property was not listed as soon as practically possible. It is for the above reasons that you do not meet the requirements for the Commissioner to extend the 2-year time period as the property could have been sold at an earlier stage. The Commissioner will not be exercising his discretion to extend the 2-year period for you to dispose of the property. Therefore, any capital gain made on the property from the date the deceased passed away until the property was disposed of will be subject to tax. You are also entitled to the 50% CGT discount in relation to the property.