Private ruling: CGT – deceased estate – Commissioner’s discretion to extend the two year period – main residence exemption
Date of advice: 27 March 2019
Published: May 2019
Ruling period: Year ended 30 June 2019
Date scheme commenced: 1 July 2018

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 for the main residence located at the property? | A1: Yes. | Q2: Will the Commissioner exercise his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension of time to the two year period for the sale of the self-contained unit located at the property? | A2: No | Q3: Will the Commissioner exercise his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension of time to the two year period on the sale of the pre Capital Gains Tax (CGT) land on which the self-contained unit was built? | A3: No. | Q4: Are you entitled to use the discount method of calculating your capital gain on the sale of the self-contained unit? | A4: Yes. | Q5: Are you entitled to use the discount method of calculating your capital gain on the sale of the land on which the self-contained unit was built? | A5: Yes.

Relevant facts and circumstances: The deceased purchased the property prior to 19 September 1985. After 19 September 1985 one of the deceased’s sons, (Son A), built and resided in a residence at the rear of the property. Sometime later the property was subdivided into two blocks, one block held the initial dwelling (the dwelling) whilst the other held the residence built at the rear of the property. At approximately the same time as the property was being subdivided the deceased built a self-contained unit towards the back of the dwelling which was rented out as soon as practicably. These payments were not paid to the deceased estate but were paid to Son A. Approximately 10 years after the self-contained unit was built the deceased was admitted to hospital where they spent a period of time before being transferred to a nursing home. A short time later the deceased passed away. The deceased’s will dated named Son B (you) as Executor and trustee of the will. The dwelling was the deceased’s main residence at the time of death. Soon after the death of the deceased, you discovered that two of the deceased’s grandchildren had access to, and was stealing from, the deceased’s bank account. A few months after the deceased passed away you discovered that Son A had taken out a large mortgage over the dwelling. On legal advice Son A was advised to transfer this mortgage to another property he owned. For a period of time after you discovered that Son A had taken out a large mortgage over the dwelling you contacted Son A monthly to attend to the request. During this time you and your spouse attended to clearing and cleaning the dwelling as it had been left in a state of squalor due to the deceased deteriorating health and the hoarding of generations of items. A short time later Son A advised you he was going to contest the deceased’s will and place a caveat on the dwelling. At the same time Son A’s solicitor filed an Originating Motion in the Supreme Court. Soon after you approached a real estate agent to sell the deceased’s dwelling. At this time the real estate agent discovered that, following the building of Son A’s dwelling and subdivision, Son A neglected to ensure proper access to the main street from the rear subdivision for provision of his own mailbox. Regular requests were made by you to Son A to rectify the error as stipulated by council regulations. A few months after Son A’s solicitor filed an Originating Motion in the Supreme Court you were served. Since this time you and your solicitors have been trying to negotiate a settlement with Son A without success. Following extensive investigation and negotiation between legal representatives for the deceased’s estate and her two grandchildren a settlement was reached. Approximately 12 months after the passing of the deceased a copy of the title to the deceased’s dwelling was given to you free of any mortgage. Approximately 12 months after you received a copy of the deceased title you were advised by your lawyer that there was no caveat placed on the dwelling. A short time later the dwelling went to auction and was sold.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 118-110 | Income Tax Assessment Act 1997 section 118-115 | Income Tax Assessment Act 1997 section 118-120 | Income Tax Assessment Act 1997 section 118-130 | Income Tax Assessment Act 1997 section 118-145 | Income Tax Assessment Act 1997 section 118-195

Reasons for decision: Summary: The capital gains provisions allow for concessional treatment to be given to a dwelling that was owned by a deceased person if the executors of the deceased person’s estate sell that dwelling within two years of the date of death. Any capital gain or capital loss made on the sale of such a dwelling is disregarded if the dwelling was: ● Acquired by the deceased before 20 September 1985, or ● The deceased’s main residence when they died. The Commissioner has the discretion to extend the two year period. This extension is generally only granted where the executors are merely arranging the ordinary sale of the dwelling and the cause of the delay is beyond their control (for example, if the will is challenged). There must not be any other factors mitigating against exercising it. In your case, the delay in disposing of the dwelling was due to the will of the deceased being challenged. This delay prevented you from disposing of the dwelling within the two year time limit. The Commissioner accepts that it is appropriate to grant the extension that you have requested. The capital gains provisions allow for concessional treatment to be given to a dwelling that was owned by a deceased person if the executors of the deceased person’s estate sell that dwelling within two years of the date of death. Any capital gain or capital loss made on the sale of such a dwelling is disregarded if the dwelling was: ● acquired by the deceased before 20 September 1985, or ● the deceased’s main residence when they died. The Commissioner has the discretion to extend the two year period. This extension is generally only granted where the executors are merely arranging the ordinary sale of the dwelling and the cause of the delay is beyond their control (for example, if the will is challenged). There must not be any other factors mitigating against exercising it. In this case the self-contained unit was rented from the time it was constructed. As the unit was constructed after 20 September 1985, rented out and never the main residence of the deceased it has not meet the requirements in section 118-195 of the ITAA 1997 therefore the Commissioner’s discretion is not available. The capital gains provisions allow for concessional treatment to be given to a dwelling that was owned by a deceased person if the executors of the deceased person’s estate sell that dwelling within two years of the date of death. Any capital gain or capital loss made on the sale of such a dwelling is disregarded if the dwelling was: ● Acquired by the deceased before 20 September 1985, or ● The deceased’s main residence when they died. The Commissioner has the discretion to extend the two year period. This extension is generally only granted where the executors are merely arranging the ordinary sale of the dwelling and the cause of the delay is beyond their control (for example, if the will is challenged). There must not be any other factors mitigating against exercising it. In your case the self-contained unit and land attached was rented from the time the self-contained unit was constructed. The land under the unit maintains its pre CGT status until the death of the deceased but is not entitled to the Commissioners discretion after that time as the land and the unit do not meet the requirements in section 118-195 of the ITAA 1997. As these conditions are not met the Commissioner is not able to consider the discretion. Under section 115-5 of the ITAA 1997 you make a discount capital gain if the following requirements are satisfied: ● you are an individual, a trust or a complying superannuation entity ● a capital gains tax (CGT) event happens to an asset you own ● the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999 ● you acquired the asset at least 12 months before the CGT event, and ● you did not choose to use the indexation method. Under the discount method you reduce your capital gain by the discount percentage. For individuals, the discount percentage is 50%. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years. The discount capital gain is included in your assessable income and taxed at the marginal rate applicable to that income for that year. In this case, the deceased built a self-contained unit in her backyard in 2007. As the deceased owned the self-contained unit for more than 12 months and its sale occurred after 21 September 1999, you are able to make a discount capital gain where the sale of the self-contained unit results in a capital gain. Under section 115-5 of the ITAA 1997 you make a discount capital gain if the following requirements are satisfied: ● you are an individual, a trust or a complying superannuation entity ● a capital gains tax (CGT) event happens to an asset you own ● the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999 ● you acquired the asset at least 12 months before the CGT event, and ● you did not choose to use the indexation method. Under the discount method you reduce your capital gain by the discount percentage. For individuals, the discount percentage is 50%. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years. The discount capital gain is included in your assessable income and taxed at the marginal rate applicable to that income for that year. Under section 128-15 of the ITAA 1997 the pre-CGT status of an asset is not maintained past the death of the owner of the asset. Where an asset passes to the deceased estate within the meaning of section 128-15 of the ITAA 1997, the estate will be taken to have acquired the asset on the date of the deceased’s death. The market value of the asset at the time the deceased passed away will be the cost base of the asset for CGT purposes. In this case, you are considered to have acquired the pre-CGT land at the date of death of the deceased. As you have owned pre-CGT land for more than 12 months and its sale has occurred after 21 September 1999, you are able to make a discount capital gain where the sale of the pre-CGT land results in a capital gain.