Edited version of private advice

Authorisation Number: 1051687294456

Date of advice: 05 June 2020

Ruling

Subject: Capital gains tax - deceased estate - extending the two-year time period.

Question

Will the Commissioner exercise the discretion under section 118-195 of the Income Tax

Assessment Act 1997 and extend the two year time period?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2016

Relevant facts and circumstances

Your late husband passed away on in 20XX and his deceased estate was administered accordingly ending in 20XX.

In late 20XX your late husband inherited a property from his parents (your in-laws), who both passed away in and around 20XX and 20XX.

Your in-laws purchased the property before 20 September 1985 and this was their main residence up until their date of deaths.

From 20XX you and your late husband both maintained all the necessary expenses and upkeep on the property. The property was:

• left vacant for approximately a decade;
• no business was being conducted from the property; and
• no rental income was being produced.

This was not your main residence for you or your late husband.

When you inherited after the passing of your late husband in 20XX you were experiencing multiple health issues and this was affecting your quality of life.

You had several surgeries and this required several months of physiotherapy and many weeks and months to recover, and you still need ongoing support.

Your health issues did not allow you to attend to the sale of the property when you needed to.

When you were able to attend to the preparation in placing the property for sale, repairs and maintenance were required for the house to be sold in a fit and proper state and this caused further delays.

You require regular assistance in attending to daily needs.

The property was placed on the market for sale accordingly and sold.

You have incurred a capital gain.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 100-10(1)

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Summary

The discretion to apply the two-year period to extend the sale of the property, does not apply to your situation for a property that you inherited that was never your main residence or the main residence of your late husband.

Detailed reasoning

Capital gains tax

A capital gain or capital loss is made when a capital gains tax (CGT) event happens to a CGT asset you own under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997).

The most common event is CGT event A1 which happens under section 104-10 of the ITAA 1997 when a person disposes of a CGT asset to someone else.

A capital gain is made if the amount received (called capital proceeds) from the disposal exceeds the cost base (the cost of the asset and certain other costs associated with acquiring, holding and disposing of the asset) of the CGT asset.

According to subsection 100-10(1) of the ITAA 1997 your net capital gain is the total of your capital gains for the income year, reduced by any capital losses that you have made.

CGT exemption

If you inherit a deceased person's dwelling, you may be exempt or partially exempt when a CGT event happens to it. The same exemptions apply if a CGT event happens to a deceased's estate of which you are the trustee.

Section 118-195 of the ITAA 1997 provides that one of the circumstances in which the capital gain on the disposal of a dwelling is disregarded is if the deceased acquired the dwelling before 20 September 1985 and your ownership interest in the dwelling ends within 2 years of the deceased's death. If the dwelling was acquired on or after 20 September 1985 the exemption will still apply if the dwelling was the deceased's main residence just before their death and was not then being used for the purpose of producing income.

Under subsection 118-195(1) of the ITAA 1997, a trustee or beneficiary of a deceased estate may apply to the Commissioner to grant an extension of the 2 year period, where the CGT event happens in the 2008-09 income year or later income years. Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example:

• 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)
• settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control.

These examples are not exhaustive.

In exercising the discretion, the Commissioner will also take into account whether and to what extent the dwelling is used to produce assessable income and for how long the trustee or beneficiary held the ownership interest in the dwelling.

Examples of where the Commissioner has not exercised the discretion:

• property not placed on the market for sale until after 2 years has passed (and no valid reason given for delay)
• improvements/renovations carried out to increase market value prior to sale
• subdivision undertaken by the executors which is not contemplated or required by the deceased's will
• a beneficiary has been allowed to live in the property by the executor but this is not expressly provided for in the will

Calculating your taxable capital gain

When you dispose of a CGT asset, you make a capital gain if the capital proceeds you receive from the disposal are more than the cost base of the asset:

(Capital gain = capital proceeds - cost base)

Additionally, if you have held the asset for more than 12 months, you will be able to apply the general 50% discount to any capital gain (after reducing the capital gain by any capital losses you have made in the relevant year or carried forward from previous years).

You will make a capital loss of the capital proceeds you receive are less than the reduced cost base of the asset:

(Capital loss = reduced cost base - capital proceeds)

Where you acquire a property as a beneficiary of a deceased estate and the property was the deceased's main residence (or acquired by the deceased prior to 20 September 1985), you are taken to have acquired that property for the market value of the property on the date of the deceased's death (this becomes the first element of your cost base or reduced cost base).

Application to your circumstances

In this case, your late husband was bequeathed the property after his parents both passed away and he inherited this dwelling. At no time, was the property your main residence nor your late husband's main residence.

Upon his death in 20XX you then inherited the dwelling. At all times the property remained vacant, no business was conducted from the property and no rental income was being produced.

You have incurred expenses or running costs and have maintained these outgoing costs including the costs in preparing the property for sale.

Upon disposal this property was not your main residence and therefore the discretion to extend the two-year period does not apply to your situation because your late husband acquired this dwelling from the death of both his parents. Before he passed away, this was not your late husband's main residence nor was it yours and therefore you cannot disregard any capital gain from the sale of this dwelling and the two year extension cannot be exercised.

As you have incurred a capital gain and as the property was the main residence of your late husband's parents who originally acquired the dwelling prior to 20 September 1985, the cost base of the property will include the market value of the property when your late husband acquired it in 20XX. Any expenses you have incurred since 20XX, such as rates, garden maintenance or other costs can be included in your first element of your cost base.

As an individual taxpayer and as you have held your interest in the property for more than 12 months, you can reduce the resulting capital gain by 50%.

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