Edited version of private advice

Authorisation Number: 1052031484332

Date of advice: 8 September 2022

Ruling

Subject: Capital gains tax

Question

Will the commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the two-year capital gains tax (CGT) exemption to dispose of the property?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

The deceased passed away a few years ago.

The property was purchased by the deceased approximately two decades ago.

The property was less than 2 hectares.

The estate was left to Individual Z who is the sole beneficiary of the estate.

It was always Individual Z's intention to sell the property.

At the time of the deceased's death Individual Z's health was not good.

The property needed to be cleaned out and repairs carried out on the property prior to it being sold.

By the time Individual Z felt strong enough to start the process of cleaning out the house COVID had started which made it difficult to get trades people to carry out the work on the property.

The property was vacant until Individual Z moved into it.

Individual Z placed their own unit up for rent when they moved into the deceased's property.

In order to move in, Individual Z organised extensive cleaning of the property.

During the time Individual Z lived in the property other extensive work and repairs both inside and outside were carried out.

The enormity of making the property saleable without any assistance impacted on Individual Z's health.

The difficulties of COVID and Individual Z's poor health caused the unexpected delay in selling the property.

The property was sold several years after the date of death on xx 20xx with settlement on xx 20xx.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-195(1)

Reasons for decision

The main residence exemption in section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to disregard a capital gain or capital loss a taxpayer makes from a capital gains tax (CGT) event that happens to a dwelling that is their main residence.

If a taxpayer inherits an ownership interest, subsection 118-195(1) of the ITAA 1997 applies so that any capital gain or capital loss they make from a CGT event that happens in relation to a dwelling or their ownership interest in a dwelling is disregarded if:

•                    They are an individual and the interest passed to them as a beneficiary in a deceased estate, or they owned it as the trustee of a deceased estate; and

•                    The deceased acquired the ownership interest on or after 20 September 1985 and the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income; and

•                    Their ownership interest ends within two years of the deceased's death, or within a longer period allowed by the Commissioner.

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.

•                    Factors that would weigh against the granting of the discretion include:

•                    Waiting for the property market to pick up before selling the dwelling.

•                    Property used to earn assessable income.

•                    Unexplained periods of inactivity by the executor in attending to the administration of the estate.

The above examples are not exhaustive.

In addition, once any circumstances preventing the sale of the property have been resolved, the property needs to be placed on the market as soon as possible to enable its disposal.

Application to your circumstances

The delay in selling the property was partly due to a period of inactivity by Individual Z from the date their mother died until they moved into the property.

The property was not placed on the market as soon as practically possible during the 2-year period allowed by the Commissioner to sell a property.

Although Individual Z had some health problems the inactivity appears to be the predominate reason for the delay in the sale of the property.

It is for the above reasons that you do not meet the requirements for the Commissioner to extend the 2-year time period as the property could have been sold at an earlier stage.

The Commissioner will not be exercising his discretion to extend the 2-year period for you to dispose of the property.

Therefore, any capital gain made on the property from the date the deceased passed away until the property was disposed of will be subject to tax. You are also entitled to the 50% CGT discount in relation to the property.

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