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

Ruling: Q1: Will the Commissioner exercise his discretion and allow an extension of time to the two year period? | A1: Yes

Relevant facts and circumstances: A property was purchased by your elderly relatives prior to 20 September 1985. Both these relatives died prior to 20 September 1985 and the property was then left to your parent A. Your parent A married and was widowed after 20 September 1985. Your parent A passed away after 20 September 1985 and left the property to you and your two siblings (sibling A and sibling B). The property was your parent's main residence at the time of death. Your parent added a codicil to her/his Will to state that sibling A could live, rent free in the property until that sibling decided to leave or sell the property. Sibling A passed away approximately seven years after your parent and the whole property passed to you and sibling B. One week prior to sibling A passing you and sibling B were given the keys to get something from the home and you found that sibling A had left the property in a severe state of untidiness. As part of sibling A's estate there were other properties, located elsewhere, that had to be cleaned out. The problem was so severe that you were not able to stay in the house while you were there to clean it out; you stayed at the caravan park. Just after your parent passed away, you contracted a serious illness which left you limited in the amount of physical activity you can undertake at one time. In addition it was thought that another close family member may have had a serious illness at that time. That family member had to give up working. You and sibling B live in quite a distance away from the property which meant a lot of travel was involved for you both to clean out the house. In addition, as the home had been in the family for three generations you could not just pay someone to clean the home out as it contained items and documents that had belonged to your descendants. Due to your parent A's codicil allowing sibling A to live in the property, your health issues, the distances to the property from your homes and the enormity of the clean-up involved, a deposit for the sale of the home was not able to be taken until approximately ten years after the death of your parent A. Prospective buyers weren't able to even look over the home prior to this. The property has never been used to produce assessable income. Settlement occurred over 10 years after your parent A's death.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-195 | Explanatory Memorandum for the Tax Laws Amendment (2011 Measures No 9) Act 2012

Reasons for decision: Summary: Please note that all references are to the Income Tax Assessment Act 1997. | Detailed Reasoning - Capital gains tax: A capital gain or capital loss is the difference between what it cost you to acquire an asset and what you receive when you dispose of that asset. You pay tax on your capital gains. It forms part of your income tax and is not a separate tax, although it is generally referred to as capital gains tax (CGT). If you make a capital loss, you cannot apply it against ordinary income but you can use it to reduce a capital gain made in the same year. If your capital losses are more than your capital gains or you make a capital loss in an income year you don't have a capital gain, you can generally carry the loss forward and deduct it against capital gains in future years. All assets you've acquired since tax on capital gains came into effect (on 20 September 1985) are subject to CGT unless specifically excluded. Selling assets such as real estate is the most common way you make a capital gain or capital loss. Some of your main personal assets are exempt from CGT, including your home, car, and most personal use assets, such as furniture. If you're an Australian resident, CGT applies to your assets anywhere in the world. | Detailed Reasoning - CGT exemptions: There are rules for situations where capital gains and losses can be disregarded for main residence dwellings. Where a dwelling passes to you as trustee or beneficiary of a deceased estate and the deceased acquired the dwelling before 20 September 1985, any capital gain or capital loss made upon its sale is disregarded as long as: • the property is sold within two years of the deceased's death, or within a longer period allowed by the Commissioner; or • from the deceased's death until you sell the dwelling, it was the main residence of one or more of: • the spouse of the deceased immediately before the death; or • an individual who had a right to occupy the dwelling under the deceased's Will; or • if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary - that individual. The Commissioner has discretion to extend the two year time period where the trustee or beneficiary of a deceased estate's ownership interest ends after two years from the deceased's death. 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. | Detailed Reasoning - Application to your circumstances: Your parent A acquired the property after the death of your elderly relatives prior to 20 September 1985 and it was the main residence of that parent until death after 20 September 1985 at which time you and your two siblings became the owners. Your parent A's Will contained a codicil dated instructing that sibling A be allowed to live in the property until they wished to leave or to sell it. Sibling A continued to live in the property until his/her death approximately seven years later. There is therefore a period of over 10 years from the date of your parent A's death until the property was sold under a contract. You were prevented from selling the property due to your parent A's codicil allowing sibling A to live in the property. Sibling A passed away approximately seven years later. The delay in selling the property under these circumstances was beyond your control. Following the death of sibling A you and sibling B were faced with the task of clearing out the results of over ten years of hoarding by sibling A. The problem was so severe that you were not able to stay in the house while you were there to clean it out; you stayed elsewhere. You were not able to employ commercial cleaners as the home had been in your family for many years and there were many important family items and documents that had to be sifted and retrieved. The situation was exacerbated by your health issues and the distances both you and sibling B had to travel from your homes. Eventually you were in a position to sell the property and you received a deposit approximately 10 years after the death of parent A. The contract settled over 10 years after that death. Having considered the facts as outlined above, the Commissioner is able to apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit to allow you an exemption due to the complexity of the administration of the deceased's estate.