Edited version of private advice

Authorisation Number: 1051755401918

Date of advice: 24 September 2020

Ruling

Subject: Capital gains tax - deceased estate - two year discretion

Question

Will the Commissioner exercise 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 periods:

Year ending 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts

Your parent acquired a dwelling (the dwelling).

Your parent moved into residential care in 20xx.

Your parent passed away a short time later. (The deceased)

The dwelling had been the deceased's main residence prior to passing away.

Your sibling (person B) also resided in the dwelling.

Under the will of the deceased, there no a clause in the will which provided for a right to reside in the dwelling or a life interest to occupy the deceased's dwelling.

You and person B inherited an equal interest in the dwelling and title to the dwelling passed to you under the will of the deceased.

You have provided a statutory declaration dated X XX 20XX in which person B has declared that it was the deceased's wish that they remain in the dwelling after their death due to person B's ongoing medical issues.

Person B has also declared that they needed to remain in the dwelling rent free while they navigated numerous medical issues.

Person B has been on a disability pension for a period of time.

Person B has been under the care of a medical professional.

By the end of 20xx person B's health had begun to improve which enabled them to consider moving.

The dwelling was prepared for sale a short time later.

Settlement occurred a short time later.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10,

Income Tax Assessment Act 1997 section 118-195 and

Income Tax Assessment Act 1997 subsection 118-195(1).

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.

For a dwelling acquired by the deceased on or after 20 September 1985, the dwelling must have been used as the deceased's main residence just before their death and not used to produce assessable income at that time.

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. 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.

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.

In your case the main reason for the Commissioner not exercising the discretion is the length of time that the dwelling was not sold by the beneficiaries.

You could have decided to sell the property and use to the proceeds to meet the living expenses of person B or to find suitable alternative accommodation.

You should have been aware that the decision to allow person B to continue to reside in the dwelling would have capital gains tax consequences for you.

The period of time that the dwelling has not been sold by the beneficiaries is more than X years and it is considered that this period of time is significant for the Commissioner to consider extending period of time.

Having considered the relevant facts, the Commissioner will not apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit.

The normal capital gains tax (CGT) rules will apply to the disposal of the property

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