Private ruling: CGT - Main Residence Exemption - Commissioner's Discretion
Date of advice: 30 September 2015
Published: November 2015
Ruling period: Period ending 30 June 2016
Date scheme commenced: The scheme has commenced

Ruling: Q1: Will the Commissioner exercise his discretion to extend the time period in subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) where the trustee or beneficiary of a deceased estate's ownership interest ends after two years from the deceased's death? | A1: Yes

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. You are the executor of your relative's estate Your relative inherited the dwelling in 197X. It was a pre-CGT asset. The dwelling was your relative's main residence. Your relative died in 200X. The will created a lifetime right to occupy for an individual and left the house to beneficiaries. The house was the lifetime right to occupy individual's main residence. The lifetime right to occupy individual died in 201X. You acted immediately to place the house on the market. The house was not used for an income earning purpose after the death of the individual with the right to occupy. You expect to finalise the sale a short time after the death of the individual with the right to occupy.

Relevant legislative provisions: Subdivision 115-A of the Income Tax Assessment Act 1997 Section 118-195 of the Income Tax Assessment Act 1997 | Section 118-200 of the Income Tax Assessment Act 1997 | Explanatory memorandum to the Taxation Laws Amendment Bill (No.9) of 2011 (Cth)

Reasons for decision: Summary: Subsection 118-195(1) of the ITAA 1997 allows a trustee of a deceased estate to disregard a capital gain or loss from a dwelling that a deceased person acquired after 20 September 1985 if: • the dwelling was a pre-CGT asset at the time of the deceased's death; and • your ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner. In your case, the dwelling was a pre CGT asset as well as your relative's main residence just before their death, and was not being used to produce assessable income. Although your ownership interest in the dwelling did not end within two years after the date of your relative's death, in view of your particular circumstances the Commissioner will exercise his discretion to extend the two year exemption period until a certain date, a short time after the right to occupy ended. The sale of the property will therefore not be subject to CGT if sold within this time. The Explanatory Memorandum for the Tax Laws Amendment (2011 Measures No. 9) Act 2012 explains the Commissioner would be expected to exercise discretion (in sections 118-195 and 118-200) 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. These examples are not exhaustive. In exercising this discretion, the Commissioner is expected to consider whether and to what extent the dwelling is used to produce assessable income and the period that the trustee or beneficiary held the ownership interest in the dwelling. | Detailed Reasoning - Application of Commissioner's discretion in your case: In your case, following the guidance in the Explanatory Memorandum, the Commissioner will exercise his discretion under section 185-195 of the ITAA 1997 on the grounds that, during the period of the estate's administration, there was a legal impediment to the sale of the property while the life interest existed. In addition the dwelling was not used to produce assessable income, you acted to sell the property at the first opportunity available to you, and that if the Commissioner did not exercise his discretion the actual taxable gain (if any) would be small compared to the effort and expense in calculating the gain. | Detailed Reasoning - Further information: If you fail to complete the sale of the property by a certain date, you will still be eligible for a partial CGT exemption. | Detailed Reasoning - Partial main residence exemption: Where section 118-195 of the ITAA 1997 does not apply, you may be entitled to a partial exemption on any capital gain under section 118-200 of the ITAA 1997 when, from the deceased's death until your ownership interest ends, the dwelling was the main residence of an individual who had a right to occupy the dwelling under the deceased's will for part of your ownership period. In your case, your relative died in 200X. The dwelling was then occupied by an individual who had a right to occupy the dwelling under your relative's will, until 201X. Therefore, you are entitled to a partial main residence exemption for this period. | Detailed Reasoning - Calculating the partial main residence exemption: Where the deceased acquired the dwelling before 20 September 1985, you calculate your capital gain or capital loss as follows: | Detailed Reasoning - Capital gain/loss amount x (non-main residence days / total days): Where: • non-main residence days are the number of days in the period from the deceased's death until settlement of your contract for sale of the dwelling when it was not the main residence of an individual who had a right to occupy the dwelling under the deceased's will, and • total days is the number of days from the deceased's death until you disposed of your ownership interest In your case: • the non-main residence days will be the number of days from the date of death of the individual with a right to occupy until the date of settlement when you sell the dwelling • the total days will be the number of days from the date of your relative's death until the date of settlement when you sell the dwelling | Detailed Reasoning - Discount method: A discount capital gain is a capital gain that satisfies the requirements of subdivision 115-A of the ITAA 1997. In the case of an individual, the capital gain must result from a CGT event happening after 21 September 1999, be worked out without the cost base being indexed, and result from a CGT event happening to a CGT asset owned by the taxpayer for at least 12 months. The discount percentage is 50% if the gain is made by a resident individual. In your case, you acquired the dwelling more than 12 months ago. As you are an individual that has held the dwelling for more than 12 months, you therefore meet the requirements of subdivision 115-A of the ITAA 1997 and can apply the discount method when calculating your capital gain.