Edited version of private advice

Authorisation Number: 1051704643886

Date of advice: 19 October 2020

Ruling

Subject: Commissioner's discretion to extend the two year period

Question

Will the Commissioner exercise the discretion to extend the two year period to dispose of the dwelling acquired from the deceased estate under subsection 118-195(1) of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June XXXX

The scheme commences on:

8 June XXXX

Relevant facts and circumstances

Mrs X (Deceased) died on XX/XX/XXXX leaving a Will.

The Will named Mr A as the sole Executor and Trustee (Trustee) for the Estate of Mrs X (Estate).

Mr A is the son of the Deceased. Probate was granted to Mr A on XX/XX/XXXX.

The Will provides that all rest and residue of the Estate (real and personal) will be given to the Trustee; and convert all assets into money and hold the net proceeds together with other parts of the Estate which may for the time being not converted into cash on trust to:

·         pay all debts and testamentary expenses; and

·         distribute the balance to the individual beneficiaries equally as tenants in common.

The Trustee for the Estate registered for a TFN on XX/XX/XXXX. The Estate is not fully administered yet.

The Property

The property is land which is more than X hectares. The land was purchased by the Deceased solely before 20 September 1985 (pre-CGT).

A house was constructed on the land pre-CGT. The house was used as the main residence of the Deceased the whole of the ownership period until the date of death of the Deceased.

It's asserted the land was used for primary production by the Deceased in partnership with the Deceased's spouse until the Deceased's death.

A statutory declaration has been provided signed by a registered tax agent, to say that he prepared the partnership and personal income tax returns of the Deceased and the Deceased's spouse from a certain year until the Deceased's death; and that during those years the partnership was operating a primary production enterprise.

However, the statutory declaration does not support that a partnership business had been carried on during those years by the Deceased and the Deceased's spouse.

It is submitted that after the death of the Deceased's spouse, the land was used for primary production by the Deceased as sole trader until 20XX; and after that time, by others until the date of death of the Deceased. A copy of the personal income tax returns of the Deceased showing primary production income but for three income years only.

Issues causing delay in sale of the property

·         Complexities with legal access to the farm not known by the owner before death. This refers to a small parcel of land between council road and the property owned by the neighbours living on the opposite side of the council road. This needed to be resolved before the property could be sold, otherwise there would be no access to the property. To resolve the access issue, it would involve either acquiring the small parcel of land or obtaining a right of way across the land.

·         A disused unmade Crown road also existed between the neighbour's land and the property in which the house and related out buildings of the property encroached on this Crown road. This needed to be resolved also before the land could be sold or else, clear title to the dwelling and buildings could not be provided. Resolution for this issue would involve an application to close and purchase the Crown road.

Steps taken to resolve the issues

Legal access to the property needed to be resolved first. The Trustee negotiated to acquire the neighbour's land; and an agreement was reached. At the cost of the Estate, a right of carriageway was created by transfer and registered two years later. Fencing issues on the new boundaries also arose which required further negotiations over some months before they were finally resolved.

As it appeared that the access issue would be resolved, the Trustee made application to Close and Purchase Crown Road. The negotiations with the Crown were fast tracked by the Crown but still took quite long to resolve. Many such applications can take up to 5 years or may be more but, in this case, the transfer and registration completed in just over 12 months.

Matters concerning transfer of property title

It's asserted the title deed of the property would need to be in the names of living persons before the access issues could be resolved and new titles registered.

The Trustee (Mr A who's one of the beneficiaries) was advised by the solicitor to have the title deed to be transferred after the Grant of Probate to the Trustee. However, Mr A felt the transfer of the title deed was not right because there are other beneficiaries entitled to the property.

At that time, it seemed the solicitor failed to explain that the transfer of the title deed would be to Mr A in his capacity as Trustee of the Estate and not in his personal capacity as an individual.

As a result, the Trustee transferred the title deed of the property to the individual beneficiaries. At the time of transfer, the title deed was still in the name of the Deceased. The property's title deed was never in the name of the Estate's Trustee at any point in time.

Sale of the property

The property was listed for sale in month/XXXX and the relevant parties entered into the sale contract two months later. The sale of the property was completed in month/XXXX. The sale contract and all other legal documents relating to the sale of the property were signed by the beneficiaries of the Estate being the registered owners of the property. It's confirmed that the beneficiaries made a capital gain from the sale of the property.

Relevant legislative provisions

Income Tax assessment Act 1997

section 104-10

section 104-215

subsection 118-110(4)

section 118-115

section 118-120

section 118-195

section 128-10

section 128-15

section 128-20

Other references

Practical Compliance Guidelines PCG 2019/5

Taxation Determination TD 1999/67

Taxation Determination TD 1999/68

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified.

When you die, a capital gain or capital loss from a CGT event that results for a CGT asset you owned just before dying is disregarded under section 128-10. There is an exception to this rule in section 104-215, if the CGT asset passes to a beneficiary in your estate who is:

·         an exempt entity; or

·         the trustee of a complying superannuation entity; or

·         a foreign resident.

Under section 128-15, the CGT assets you owned just before you die would either:

a)    devolve to your legal personal representative (LPR); or

b)    pass to a beneficiary in your estate.

The LPR or beneficiary is taken to have acquired the CGT asset on the day you died based on subsection 128-15(2). The cost base rules for both the LPR and the beneficiary are set out in the table in subsection 128-15(4).

Any capital gain or capital loss the LPR makes if the asset passes to a beneficiary in your estate is disregarded under subsection 128-15(3).

Section 128-20 sets out the circumstances when does an asset pass to a beneficiary.

A CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset under your will, or that will as varied by a court order - see paragraph 128-20(1)(a).

Section 118-195 sets out the circumstances in which the main residence exemption is available to an individual beneficiary or a trustee of a deceased estate.

Relevantly, subsection 118-195(1) provides that 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 ifyou are an individual and the interest passed to you as a beneficiary in a deceased estate, and

·         the deceased acquired the ownership interest before 20 September 1985; and

·         your ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner; and

·         the deceased was not an excluded foreign resident just before the deceased's death.

Subsection 118-110(4) defines an excluded foreign resident where it states:

You are an excluded foreign resident, at a particular time, if:

(a)  you are a foreign resident at that time; and

(b)  the continuous period ending at that time for which you have been a foreign resident is more than 6 years.

CGT event A1 in section 104-10 (disposal event) is a relevant CGT event for the purposes of section 118-195.

Practical Compliance Guidelines PCG 2019/5: The Commissioner's discretion to extend the two year period to dispose of dwellings acquired from a deceased estate sets out the factors which the Commissioner considers when deciding whether to exercise the discretion to extend the two year period.

Section 118-115 provides the meaning of a dwelling for the purposes of the main residence exemption.

Subsection 118-120(1) provides the main residence exemption applies to a dwelling's adjacent land (if the same CGT event happens to that land or your ownership interest in it) as if it were a dwelling.

Land adjacent to a dwelling is its adjacent land to the extent that the land was used primarily for private or domestic purposes in association with the dwelling - subsection 118-120(2).

Subsection 118-120(3) provides that the maximum area of adjacent land covered by the main residence exemption for the CGT event (the current event) is X hectares, less the area of the land immediately under the dwelling.

Application to your facts and circumstances

The exception to the rule in section 104-215 does not apply. Based on the Will, the Trustee can transfer the property to the beneficiaries as tenants in common on equal shares provided all the liabilities of the Estate have been satisfied.

The Trustee transferred the property to the individual beneficiaries in XX/XX/XXXX. From that time the beneficiaries became the owners of the property under the Will. As such, the property is taken to have passed to the beneficiaries in the circumstance set out in section 128-20.

Any capital gain or capital loss the Trustee made when the asset passed to the beneficiaries of the Estate would be disregarded under subsection 128-15(3).

Subsequent disposal of the property by the beneficiaries would be subject to CGT.

The timing of CGT event A1 (disposal event) is when you enter into the contract for the disposal - see subsection104-10(3).

The relevant parties entered into the contract for the disposal of the property (sale contract) in December XXXX and the sale of the property was completed in month/XXXX. Based on subsection 104-10(3), CGT event A1 happened in month/XXXX.

For the purposes of the main residence exemption in section 118-195, in order for the trustee or the beneficiary to get the exemption, among other things, the disposal must happen within two years from the Deceased's death or within a longer period allowed by the Commissioner.

The disposal of the property happened outside the two year period condition. As such, the main residence exemption would only be available if the Commissioner will exercise the discretion to extend the two year period allowing a longer period.

Based on the facts, the Commissioner has a reasonable case to exercise the discretion to extend the two year period condition to dispose of the dwelling acquired from the deceased estate under subsection 118-195(1).

The other relevant conditions in subsection 118-195(1) are also satisfied because the Deceased acquired the ownership interest in the property pre-CGT and the Deceased was not a foreign resident at any point in time.

Therefore, as all the relevant conditions in subsection 118-195(1) are satisfied, the beneficiaries are entitled to the main residence exemption on the property they acquired from the Estate of the Deceased subject to the '2 hectare' limit of adjacent land. The maximum area of adjacent land covered by the main residence exemption is 2 hectares. Taxation Determination TD 1999/68 explains the meaning of adjacent land in terms of section 118-120.

Taxation Determination TD 1999/67 explains that you can apply the main residence exemption to whichever area of land you choose in addition to the land on which your dwelling is situated. The TD also provides guidance on how you calculate any capital gain or capital loss you make on the remainder of the land not covered by the exemption.

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