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Edited version of your written advice
Authorisation Number: 1012698004047
Ruling
Subject: Capital gains tax
Questions and answers
1. Is the property a pre CGT asset?
No.
2. Did person B have the right to occupy the property under the will of person A?
No.
3. Will the Commissioner exercise the discretion to extend the 2 year time period in section 118-195 of the Income Tax Assessment Act 1997?
No.
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commenced on:
1 July 2014
Relevant facts and circumstances
Person A died a number of years ago.
Person A lived in the property.
The property was purchased prior to 20 September 1985.
Person A's will states that all of their property is to be divided equally between their children.
Person A's child, Person B, lived in the property until they died recently.
Person A's will did not state that Person B had a right to occupy the property until their death, but was a verbal agreement between Person B and their siblings as per Person A's wishes.
Person B paid all costs associated with the property.
The property will settle in the near future.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Subsection 102-20.
Income Tax Assessment Act 1997 Subsection 128-15.
Income Tax Assessment Act 1997 Subsection 118-195(1).
Reasons for decision
A person makes a capital gain or a capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)).
Generally, assets a person inherits through a deceased estate are acquired on the date of death (section 128-15 of the ITAA 1997). Therefore, the trustee and beneficiaries are taken to have acquired their share of the estate on the date of Person A's death.
The first element of the cost base of an interest in a dwelling that was the main residence of the deceased just before their death, the dwelling was not used to produce assessable income and the land does not exceed 2 hectares is the market value of the dwelling on the deceased's date of death (section 128-15(4) of the ITAA 1997).
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 before 20 September 1985 if:
• The trustee's ownership interest in the dwelling ends within two years of the deceased persons death, or
• from the deceased's death until the trustees ownership interest ends (the trustee's ownership period), the dwelling was not used to produce income and it was also the main residence of one or more of the following persons:
• the spouse of the deceased immediately before death
• an individual who had a right to occupy the dwelling under the deceased's will, or
• an individual who brought about the CGT event and the ownership interest in the dwelling had passed to that individual as beneficiary.
The ownership interest of a beneficiary or trustee commences on the date of death of the deceased (section 128-15 of the ITAA 1997) and ends on the disposal of the dwelling.
A full main residence exemption will only be available if the dwelling was the main residence of one of the specified individuals during the trustee's ownership period for the entire period.
Person B did not have the right to occupy the property under Person A's will. The arrangement that resulted in Person B living in the property was a verbal agreement among the beneficiaries.
Therefore any capital gain will not be disregarded under section 118-195 of the ITAA 1997 as the property was not sold in the 2 year time period and Person B did not have the right to occupy the property under the terms of the will.
Subsection 118-195(1) of the ITAA 1997 states that if 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, then you are exempt from tax on any capital gain made on the disposal of the property acquired by the deceased after 20 September 1985 if:
• the property was the deceased's main residence just prior to their death
• it was not being used to produce assessable income at this time, and
• Your ownership interest ends within 2 years of the deceased's death.
You have an ownership interest in a property if you have a legal interest in the property. This means that if you sell a property, your ownership interest continues until the date of settlement (rather than the date the contract of sale is signed).
The following is a non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion to extend the time period in which you can dispose of the property:
• 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.
In determining whether or not to grant an extension the Commissioner is 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.
In this case the property was used by Person B from the date of Person A's death to the date Person B died.
The beneficiaries agreed to allow person b the use of the property until his death.
The delay in the sale was due to the property being used by Person B.
The Commissioner will not exercise his discretion to extend the 2 year time limit to the settlement date as the circumstances relating to the delay in the sale of the property was not beyond the executors control.
Accordingly, the sale of property will not be exempt from CGT pursuant to section 118-115 of the ITAA 1997.
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