Private ruling: capital gains tax - deceased estate - Commissioner's discretion to extend the two-year period - main residence exemption
Published: February 2014
Ruling period: 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the Commissioner exercise discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time of the two-year period? | A1: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. After 20 September 1985, the deceased purchased a property. The property was the deceased's main residence for their entire ownership period. Approximately six years later the deceased moved into a nursing home. The deceased passed away more than two years ago. The property was rented out for a period of less than six years. Settlement on the disposal of the property occurred more than two years after the passing of the deceased. The delay of settlement was occurred due for the following reasons: · the tenant in the property was not able to move into their new home until a specified date, and · the lease on the property did not cease until a specified date.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 118-130(3) | Income Tax Assessment Act 1997 section 118-195 | Income Tax Assessment Act 1997 subsection 118-195(1)

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. A capital gain or capital loss is disregarded under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) where a CGT event happens to a dwelling if it passed to you as an individual beneficiary of a deceased estate or you owned it as the trustee of the deceased estate. The availability of the exemption is dependant upon: · who occupied the dwelling after the date of the deceased's death, or · whether the dwelling was disposed of within two years of the date of the deceased's death. For a dwelling acquired by the deceased, 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 relevant 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 that person disposed of the dwelling in their capacity as beneficiary, or · your ownership interest ends within two years of the deceased's death. Even though the deceased moved into a nursing home before their death and the dwelling was being rented out, the dwelling can still be treated as their main residence under certain circumstances. You can make the choice that a dwelling that was your main residence continues to be treated as your main residence after you cease living in it. If the dwelling is used to produce income, there is a six year time limit on the continuing main residence status. If you make this choice you cannot treat any other dwelling as your main residence for that period (except for a limited time if you are changing main residences). You make the choice for the income year you enter into the contract to dispose of the dwelling. In your case, when the deceased died, the dwelling passed to you as the executor of their estate. The dwelling was being used to produce assessable income. As the executor of deceased's estate, you are entitled to make this choice on their behalf. You have made an election to treat the property as their main residence up until their date of death. However, the dwelling was not occupied by a relevant individual after the deceased's death and therefore this basis of exemption is not available. 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 property sale will settle 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, thus this alternative basis of exemption in the provision may apply. 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 (e.g. 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. The delay in disposing of the dwelling was caused by the tenant occupying the property not being able to move into their new home and the lease did not expire until a specified date. Based on the information you have provided, we believe that you do not meet the criteria to extend the two-year period in which a deceased's main residence must be disposed of. The normal capital gains tax (CGT) rules will apply to the disposal of the dwelling. | Detailed Reasoning - CGT: The most common CGT event CGT event A1 occurs when you dispose of an asset to another entity. The time of the event is when you enter into the contract for its disposal, or if there no contract when the change of ownership occurs. You make a capital gain if the capital proceeds from the CGT event are more than the asset's cost base. You make a capital loss if your reduced cost base is greater than your capital proceeds. | Detailed Reasoning - Deceased estate - main residence: Special rules apply if the dwelling was the deceased's main residence. If you inherit a deceased person's dwelling, you may be exempt or partially exempt when a CGT event occurs. Further information on the above is available on our website - www.ato.gov.au. Quick access to this information can be obtained by inputting QC 17206 into the search bar.