Private ruling: Main residence exemption
Date of advice: 26 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the dwelling on the property and allow an extension of time? | A1: No. | Q2: Are you entitled to a full main residence exemption? | A2: No.

Relevant facts and circumstances: The deceased owned a property. A family member moved back into the property with the deceased. The family member and the deceased lived together as friends and they were not in a registered relationship. The family member continued to hold tenancy of the property after the deceased’s death. The property was sold shortly after the family member’s death but over two years since the deceased died. The property was always the deceased’s main residence and was not used to produce assessable income. The deceased’s Will does not give the family member a right to occupy the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 118-195(1)

Reasons for decision: Summary: Subsection 118-195(1) of the ITAA 1997 states that if you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate, then you are exempt from tax on any capital gain made on the disposal of the property if: ● The property was acquired by the deceased on or after 20 September 1985 and the property 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; or the property was acquired by the deceased before 20 September 1985; and ● your ownership interest ends within two years of the deceased’s death (the Commissioner has discretion to extend this period in certain circumstances); or ● the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of: a) the spouse of the deceased immediately before their death (except a spouse who was living permanently separately and apart from the deceased); or b) an individual who had a right to occupy the dwelling under the deceased's Will; or c) if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary - that individual. An individual would be considered to occupy a dwelling under the deceased's Will if it was in accordance with the terms of the Will. This would also be the case if it was in pursuance of the will or under the authority of the Will (see Evans v. Friemann (1981) 53 FLR 229 at 238). In your case, you have an interest in the property that you inherited and also another interest that you purchased from a relative. These two interests will need to be addressed separately. | Detailed Reasoning - Inherited portion: You inherited a share in the deceased’s main residence that was not sold within the two year time limit. The deceased’s Will did not stipulate a right to occupy the dwelling for your family member and they were not the spouse of the deceased. While it may have been the wishes of the deceased for your family member to reside in the property, this is not enough for the purposes of the main residence exemption as there was no right to occupy the dwelling under the Will. Therefore in order to be eligible for the main residence exemption the Commissioner will need to exercise his discretion to extend the two year time limit. There are certain circumstances where the Commissioner can exercise his discretion in relation to the two year time limit, such as where: ● 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 circumstances outside the beneficiary or trustee’s control In your case, the delay in selling the property was caused by your family member continuing to reside in the property. The deceased estate is not considered to be sufficiently complex for the Commissioner to exercise his discretion. You have also not provided any evidence that the ownership of a dwelling or a Will was challenged, a trustee or beneficiary was unable to attend to the deceased estate due to unforeseen or serious personal circumstances, or that the settlement of a contract of sale was delayed or fell through. Therefore, as the dwelling was not the main residence of you, the spouse of the deceased, or by a person who had the right to occupy the dwelling, and the Commissioner cannot exercise his discretion to extend the two year time limit, the capital gain on the sale of the you inherited portion property cannot be disregarded. | Detailed Reasoning - Purchased portion: You acquired the other half of the property when you purchased your relative’s share. According to section 128-20 of the ITAA 1997, an asset passes to a beneficiary in a deceased estate if the beneficiary becomes the owner of the asset: (a) under a Will, or that Will as varied by a court order; or (b) by operation of an intestacy law, or such law as varied by a court order; or (c) because it is appropriated to the beneficiary by the deceased legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate; or (d) under a deed of arrangement if: (i) the beneficiary entered into the deed to settle a claim to participate in the distribution of the deceased estate; and (ii) any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of the estate. A CGT asset does not pass to a beneficiary in your estate if the beneficiary becomes the owner of the asset because your legal representative transfers it under a power of sale. In your case, the portion of the property that you purchased will not pass to a beneficiary under the terms of the Will, in the ways set out under section 128-20 of the ITAA 1997. As such, section 118-195 of the ITAA 1997 does not apply in this situation and any capital gain or loss made on the disposal of the purchased share cannot be disregarded.