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Edited version of your written advice
Authorisation Number: 1051212905333
Date of advice: 10 April 2017
Ruling
Subject: Capital gains tax - main residence exemption
Question 1
Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and extend the 2 year period?
Answer
Yes
Question 2
Will the Commissioner exercise his discretion to grant an extension of the Section 99 concessional income rates tax?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2017
The scheme commences on:
01 July 2015
Relevant facts and circumstances
The deceased passed away.
The deceased owned a property comprising a home unit and a garage.
The home unit and garage were purchased together.
The property was never used for income producing purposes.
One of the executors also the estate's solicitor, a sole practitioner, suffered an illness requiring an operation and long absence to recover.
It was discovered that the garage and unit were separate titles and the titles were not correctly transferred.
It was always the intention that the deceased acquired the unit and garage. It was used for their own personal purposes as part of the main residence.
Probate was granted.
The property was sold and settled.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 118-195(1)
Income Tax Assessment Act 1936 - Section 99
Income Tax Rates Act 1986 - Section 12
Income Tax Rates Act 1986 - Schedule 10 - Part 1
Reasons for decision
Question 1
Detailed reasoning
Subsection 118-195(1) of the ITAA 1997 states that if you own a dwelling in your capacity as trustee of a deceased estate (or it passed to you as a beneficiary of an estate), then you are exempt from tax on any capital gain made on the disposal of the property if:
● the property was acquired by the deceased before 20 September 1985, or
● deceased acquired dwelling after 20 September 1985 and it was their main residence just prior to death and
● your ownership interest ends within 2 years of the deceased's death (the Commissioner has discretion to extend this period in certain circumstances).
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).
In this case, the property was purchased by the deceased before 20 September 1985 but was not sold within 2 years of the deceased's date of death.
The Estate will only be able to disregard the capital gain from the sale of the property if the Commissioner extends the 2 year time period.
The Commissioner can exercise his discretion in situations such as where:
● 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 this case, one of the executors and estate solicitor, a sole practitioner, suffered an illness requiring an operation and long absence to recover.
The discovery that the unit and garage were on separate titles and the garage had erroneously not been transferred into the deceased's name when the unit and garage was originally purchased lead to a lengthy delay outside the control of the executors of the estate.
Having considered the circumstances and the factors outlined above, the Commissioner is able to apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension of time until the specified date.
Question 2
Detailed reasoning
The general practice is to assess the income of a deceased estate trust under section 99 of the ITAA 1936 unless there is tax avoidance involved. Deceased estates of the 'ordinary and traditional' kind (whose assets come directly from the assets of the deceased) are assessed under that section.
The rates of tax for trustees assessed under section 99 of the ITAA 1936 are found in section 12(6) of the Income Tax Rates Act 1986 (ITRA 1986), which directs attention to Schedule 10 of the ITRA 1986. Part 1 of Schedule 10 of the ITRA 1986 identifies two classes of trustees for the purpose of determining the rates of tax that are to apply.
In the first class are trustees who are liable to be assessed under section 99 of the ITAA 1936 in respect of resident trust estates of a deceased person where the income is derived in the year of death of the deceased or in any one of the following two years. These trustees are liable to pay tax at the rates applicable to resident individuals.
The second class of trustees identified in Part 1 of Schedule 10 of the ITRA 1986 comprises trustees liable to be assessed under section 99 of the ITAA 1936 in respect of income of a resident trust estate, other than the estate of a person who died fewer than three years before the end of the income year.
These trustees (including the trustees of testamentary trusts) are liable to tax at the rates specified for resident individuals except that they do not benefit from the tax free threshold.
There is no discretion available to the Commissioner to extend the three year period to apply the lower rates of tax or vary the rates of tax applicable under section 99 of the ITAA 1936.
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