Private ruling: Capital gains tax - Commissioners discretion to extend two year main residence exemption
Date of advice: 26 August 2016
Published: October 2016
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

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 to the two year period? | A1: Yes.

Relevant facts and circumstances: The deceased purchased a property (the property), which was the main residence of the deceased for the entire ownership period. At no time before or after death was the property used to produce assessable income. The deceased's Will, appointed Child 1 and Child 2 as the executors. Probate was granted. Child 1 moved into the property to ready if for sale, with the understanding to vacate when the property sold. The property was listed for sale. Child 1 ceased co-operating with Child 2, the estate solicitors and the estates real estate agent. Child 2 filed a claim to revoke probate. Child 1 was removed from the grant of Probate. Child 1 was required to vacate the property within 28 days. Child 1 failed to vacate. Child 2 filed a summons seeking a contempt order against Child 1. Child 1 failed to appear in court and continued to fail to vacate. The property required considerable work to ready it for sale after being left in a very poor condition by Child 1. The property was then sold and settled.

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

Reasons for decision: Summary: Subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that if you own a dwelling in your capacity as trustee of a deceased estate (or it passed to you as a beneficiary of an 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 before 20 September 1985, or • the property was acquired by the deceased 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 • your ownership interest ends within 2 years of the deceased's death (the Commissioner has discretion to extend this period in certain circumstances). You have an ownership interest in a property if you have a legal interest in the property. This means that if you sell a property, your ownership interest continues until the date of settlement (rather than the date the contract of sale is signed). You will only be able to disregard the capital gain from the sale of the property if the Commissioner extends the 2 year time period. The Commissioner can exercise his discretion in situations 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 Application to your circumstances In your case, the property was purchased by the deceased and was their main residence until they passed away. The property was not sold within 2 years of the deceased's date of death. The delay in disposing of the property was the result of ongoing legal proceedings, delaying the completion of administration of the estate. This started with the probate being changed to remove Child 1 as executor, and ending with court orders for Child 1 to vacate the property. This prevented you from disposing of the property within the two year time limit. Having considered your personal circumstances, the Commissioner is able to apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension of time. As a result of extending the two year time limit, you will satisfy all of the conditions contained in section 118-195 of the ITAA 1997. Accordingly, you can disregard any capital gain or loss that arises as a result of the disposal of the property.