Edited version of your written advice

Authorisation Number: 1012687975982

Ruling

Subject: Capital gains tax - deceased estate - Commissioner's discretion to extend the two year period - main residence exemption

Question

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?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2014.

The scheme commences on

1 July 2013.

Relevant facts and circumstances

Your parent purchased the dwelling before 1985 as the sole owner. The dwelling is on land of less than 2 hectares and was his/her main residence.

At his/her request, your parent's name was added to the title of the dwelling as tenants in common with equal shares. It was also her/his main residence.

Your parent entered residential aged care due to ill health. She elected for the dwelling to continue as her/his main residence after he/she moved into care and kept the majority of her/his personal effects at the dwelling and continued to visit there.

Your parent also entered a nursing home. He elected to have the dwelling to continue as his main residence after he/she moved into care and the house was not rented.

Your parent died.

Your sibling and you were appointed the executors of your parent's estate in his/her will.

You were the sole beneficiaries of her/his share of the dwelling. Probate was granted and title to her/his share of the dwelling was transferred into your names, as tenants in common in equal shares owning a quarter share each, with your parent retaining her/his half share, all as tenants in common.

You could not sell the dwelling at this time as you only had a half share between you and your parent, who would need to agree sell her/his half share too, would not sell.

Your parent had willed her/his half share of the house to your sibling and you as tenants in common and had appointed you as executors of her/his estate. You sold the dwelling as trustees of the estate and settlement took place

Your parent's half share was sold within 2 years of her/his death but your parent's half share was not due to your late parent's desire to hold on to the house.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 118-130(3)

Income Tax Assessment Act 1997 section 118-195

Explanatory memorandum to the Taxation Laws Amendment Bill (No.9) of 2011 (Cth)

Reasons for decision

A capital gain or capital loss may be disregarded under section 118-195 of the ITAA 1997 where a capital gains tax event happens to a dwelling if it passed to you as an individual and a beneficiary of a deceased estate or you owned it as the trustee of the deceased estate.

For a dwelling acquired by the deceased prior to 20 September 1985, you will be entitled to a full exemption if:

• the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of the following individuals:

• the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased)

• an individual who had a right to occupy the dwelling under the deceased's will, or

• an individual beneficiary to whom the ownership interest passed and the CGT event was brought about by that person, or

• your ownership interest ends within two years of the deceased's death.

In your case, when the deceased died, an interest in the dwelling passed to you. The dwelling was the deceased's main residence prior to death, and at that time, was not being used to produce assessable income. However, the dwelling was not occupied by a relevant individual after the deceased's death and therefore this basis of exemption is not available.

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 dwelling 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.

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.

The delay in disposing of the dwelling was caused by unexpected delays in the settlement of the dwelling for reasons outside the beneficiary or trustee's control and these delays prevented you from disposing of the dwelling within the two year time limit.

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.

Having considered the relevant facts, the Commissioner will apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit until 24 January 2014.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).