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Edited version of your private ruling
Authorisation Number: 1012528608388
Ruling
Subject: Capital Gains Tax-Commissioner's discretion
Commissioner's discretion to extend the time by which the sale of the main residence can be settled by the Estate while retaining its capital gains tax free status under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997)
Question 1
Will the Commissioner of Taxation exercise his discretion and extend the time within which the ownership interest may end under Item 1 Column 3 in the table in subsection 118-195(1) of the ITAA 1997 until 30 June 2015, so that the sale of the property can be settled by the Estate up to that time while retaining its capital gains tax free status?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
The scheme commences on:
9 October 2011
Relevant facts and circumstances
· The dwelling was acquired before 20 September 1985 by the deceased and her/his spouse as joint proprietors.
· The balance of the property passed to the deceased on the death of her/his spouse after 20 September 1985.
· The deceased passed away in 2011.
· This was the main residence of the deceased just before her/his death.
· Since the date of the deceased's death, the dwelling has not been the main residence of any of the following:
-the spouse of the deceased at the time
-someone entitled to occupy the dwelling under the deceased's will or
-the beneficiary who inherited the dwelling and who disposed of it.
· No one was living in the property when it was sold under the contract of sale.
· The dwelling has not been used for any income producing purposes nor have any improvements been made to the property since the date of death of the deceased.
· The executors of the estate are individuals.
· The spouse of one of the executors of the Estate who is also a beneficiary of the estate was diagnosed with a serious illness. For a period of time this prevented the executor from carrying out the duties of an executor.
· A dispute between the beneficiaries and a claim made against the executors of the estate delayed action being taken in relation to selling the property.
· The contract of sale for the property was signed in 20XX.
· The sale of the property is to be settled in 20YY.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 section 108-7
Income Tax Assessment Act 1997 section 118-195
Income Tax Assessment Act 1997 subsection 118-195(1)
Income Tax Assessment Act 1997 paragraph118-195(1) (a)
Income Tax Assessment Act 1997 paragraph 118-195(1) (b)
Income Tax Assessment Act 1997 subsection 128-15(2)
Income Tax Assessment Act 1997 section 128-50
Tax Administration Act 1953 subsection 359-5(1)
Tax Administration Act 1953 section 357-55
Reasons for decision
Subsection 118-195(1) of the ITAA 1997 states,
(1) A capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if:
(a) you are an individual and the interest * passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and
(b) at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied.
Beneficiary or trustee of deceased estate acquiring interest | ||
1 |
the deceased * acquired the *ownership interest 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 |
your * ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner |
2 |
the deceased * acquired the *ownership interest before 20 September 1985 |
the * dwelling was, from the deceased's death until your *ownership interest ends, the main residence of one or more of: (a) the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or (b) an individual who had a right to occupy the dwelling under the deceased's will; or (c) if the * CGT event was brought about by the individual to whom the * ownership interest * passed as a beneficiary--that individual |
The taxpayer is an individual and the ownership interest of the dwelling in A passed on to him/her as a trustee of the deceased estate.
After the death of her/his spouse, the deceased acquired full ownership interest in the dwelling. This occurred after 20 September 1985. The dwelling was the deceased's main residence just before the deceased's death and was not being used for the purpose of producing assessable income.
The applicant advised that the dwelling was not the main residence of any of the individuals described in item 2 under column 3 in the table in subsection 118-195(1) of the ITAA 1997.
Under subsection 128-15(2) of the ITAA 1997, the legal personal representative (LPR) of the deceased is taken to have acquired the deceased's asset on the day the person dies.
The definition of a LPR under subsection 995-1(1) of the ITAA 1997 includes an executor or administrator of an estate of an individual who has died.
Thus the executor of the estate is taken to have acquired the ownership of the deceased's estate including the dwelling.
Therefore, the trustee's ownership interest in the dwelling started on the date of death of the deceased which was in 2011 and the settlement will take place in 2014. The taxpayer has submitted a signed copy of the Contract of sale for the property as evidence.
This is more than 2 years after the date of the deceased's death. Therefore, a full main residence exemption will only be available if the Commissioner exercises his/her discretion and allows a longer period under item 1 of column 3 in the table in section 118-195 of the ITAA 1997.
According to paragraph 118-195 (1)(b) of the ITAA 1997, at least one of the items in column 2 and at least one of the items in column 3 of the table must be satisfied in order for the CGT event, that happens in relation to a dwelling or your ownership interest, to be disregarded.
As per item 2 in column 2 of the table in subsection 118-195(1) of the ITAA 1997, the deceased acquired the ownership interest before September 1985 and the dwelling was the deceased's main residence just before the deceased's death and was not being used for the purpose of producing assessable income.
In order to disregard any capital gain, it must be shown that the executor's ownership interest ends within two years of the deceased's death or within a longer period allowed by the Commissioner, as prescribed by item 1 in column 3 of the table in subsection 118-195(1) of the ITAA 1997.
Since the sale of the dwelling is to be settled more than two years after the date of the deceased's death, a full CGT exemption is available only if the Commissioner applies his discretion and allows a longer period.
In this application the taxpayer has requested the Commissioner to apply his discretion to grant an extension to the two year period and allow the full CGT exemption citing reasons why the sale was not completed within the 2 year period.
The Explanatory Memorandum (EM) to the Bill that added the discretion to section 118-195 of the ITAA 1997, the Tax Laws Amendment (2011 Measures No 9) Bill 2011, includes the following 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 unforseen or serious personal circumstances arising during the two-year period (e.g. 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.
These examples are not exhaustive. In exercising this discretion, the EM states 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.
In this case, the Will was subject to legal challenge. Orders were sought under Section 91 of the Administration and Probate Act 1958. The existence of the dispute restricted and delayed the capacity of the Executors to administer the Estate. Copies of the documents were submitted by the taxpayer as evidence.
Another reason for delays was because the spouse of one of the executors of the Estate who is also a beneficiary of the estate was diagnosed with a serious illness. For a period of time this prevented the executor from carrying out the duties of an executor. A letter from a medical specialist was submitted as evidence.
As to the question why the dwelling has such a lengthy settlement, the taxpayer states that the long settlement date for the sale of property came about because the purchaser company is a developer that proposes to build apartments on the site.
The Commissioner has the discretion to extend the two year time period in relation to CGT events that happened in the 2008-09 income year and later income years.
Accordingly, the Commissioner has considered the above reasons as to why the ownership interest in the dwelling would take longer than two years to end. The Commissioner exercises his discretion and grants an extension to the two year period until the financial year ended 30 June 2015.
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