Private ruling: Commissioner's Discretion - Main residence exemption
Date of advice: 11 November 2015
Published: January 2016
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise his 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. | Q2: Can any capital gain or loss that arises from the disposal of the property under section 118-195 of the ITAA 1997 be disregarded? | A2: Yes.

Relevant facts and circumstances: The deceased purchased vacant residential land prior to 1985. A dwelling was erected on the land after 1985. The deceased occupied the dwelling as their main residence until their death in 20XX. The property was not used to produce assessable income during the ownership period. The property was not used to produce assessable income during the deceased's estate administration. The deceased and their neighbour agreed to realign their common boundary to permit mutually convenient access prior to the deceased's death. Formal completion and registration of the boundary realignment had not occurred by the deceased's death. The executor of the deceased's estate did not discover that the boundary realignment was incomplete until they initiated the sale of the property in 20YY. The executor took immediate steps to complete the matter in order to offer the property for sale. Significant delays were encountered in finalising the realignment, with completion occurring in July 20ZZ. The property was listed for sale in August 20ZZ and sold at a public auction in a particular month 20ZZ.

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

Reasons for decision: Summary: A capital gain or capital loss is disregarded under section 118-195 of the 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 dependent 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. 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 settled 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 (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. In determining whether or not to grant an extension the Commissioner is also expected to consider whether and to what extent the dwelling is used to produce assessable income and how long the trustee or beneficiary held it. Application to your circumstances The property has been sold outside the two year period outlined in subsection 118-195(1) of the ITAA 1997. Therefore, you will only be able to disregard the capital gain from the sale of the property if the Commissioner grants an extension to the 2 year time limit. The delay in disposing of the property was caused by the complexity of the deceased's estate which could not be finalised until the boundary realignment was completed. In addition to this, there were significant complications encountered once the boundary realignment issue was discovered. Having considered the relevant facts, 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.