Edited version of private advice

Authorisation Number: 1052150058992

Date of advice: 1 August 2023

Ruling

Subject: Commissioner's discretion - main residence exemption

Question

Will the Commissioner exercise the discretion in section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the main residence exemption for the property situated at XX XX XX?

Answer

No.

This ruling applies for the following period:

Year ending 20 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased, XX XX, passed away on XX XX 20XX.

The deceased acquired joint ownership of the property at XX XX XX with their spouse in 19XX.

The property is less than 2 hectares.

The deceased's spouse passed away in 20XX. Their interest in the property passed to their surviving spouse in XX 20XX.

The property was always their main residence and never used to produce income.

Probate was granted on XX XX 20XX.

The deceased's will gave the property to their children, you and your sibling, as beneficiaries in equal shares.

There was no specific provision in the will that allowed for either you or your sibling to reside at the property.

The property was transferred to you and your sibling on XX XX 20XX.

Your sibling has resided at the property since childhood and continues to reside there.

You did not live in the property and the property was not your main residence.

You instructed your conveyancer to transfer your ownership interest in the property to your sibling on XX XX 20XX.

No contract of sale or deed of arrangement was entered. Transfer of the title was effected on XX XX 20XX.

You were not aware of the provisions for the main residence exemption regarding capital gains tax and a deceased estate, and nor were you informed by your legal representative handling you're the deceased's estate.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

Deceased estate main residence exemption

Section 118-195 of the ITAA 1997 provides a capital gains tax (CGT) exemption to beneficiaries and trustees where a CGT event happened to a dwelling they acquired from a deceased estate.

Subsection 118-195(1) of the ITAA 1997 provides that a capital gain or loss may be disregarded where a capital gains tax event occurs disposing of a dwelling passed to a beneficiary of a deceased estate within 2-years of the deceased's date of death, or, from the deceased's death until the disposal, the dwelling was the main residence of:

•         the spouse of the deceased immediately before the death; or

•         an individual who had a right to occupy the dwelling under the deceased's Will; or

•         the individual to whom the ownership interest is transferred as a beneficiary and is then sold by that individual.

Under section 128-15 of the ITAA 1997 you are taken to have acquired your 50 percent ownership interest in the property on the date the deceased passed away.

You did not dispose of your ownership interest within two years of the deceased's passing. Although the dwelling was occupied by your sibling until your ownership interest ended, they did not have a right occupy the dwelling under the Will. When you disposed of your interest in the dwelling you were the individual who brought about the relevant CGT event, however, the dwelling was not your main residence.

You do not satisfy the conditions to be eligible for a full main residence exemption under section 118-195 of the ITAA 1997. The capital gain or loss on disposal of your ownership interest in the property cannot be disregarded in the income year ended 30 June 2023 when the CGT event occurred.

Commissioner's discretion

Practical Compliance Guideline PCG 2019/5: The Commissioner's discretion to extend the 2-year period to dispose of dwellings acquired from a deceased estate (PCG 2019/5) outlines the factors that the Commissioner will consider when determining whether or not to exercise the discretion to extend the 2-year period under section 118-195 of the ITAA 1997.

Generally, the Commissioner will allow a longer period where the sale of the dwelling could not be settled within 2 years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first 2 years.

Factors that would weight in favour of the Commissioner allowing a longer period include:

•         the ownership of the dwelling, or the Will, is challenged

•         a life or other equitable interest given in the Will delays the disposal of the dwelling

•         the complexity of the deceased estate delays the completion of the administration of the estate

•         settlement of the contract of sale of the dwelling is delays or falls through for reasons outside of the trustee's/beneficiary's control

•         restrictions on real estate activities imposed by a government authority in response to the COVID-19 pandemic.

Other factors that may be relevant to the exercise of the Commissioner's discretion include, but are not limited to:

•         the sensitivity of the trustee's/beneficiary's personal circumstances and/or of other surviving relatives of the deceased

•         the degree of difficulty locating all beneficiaries require to prove the Will

•         any period the dwelling was used to produce assessable income, and

•         the length of time the trustee/beneficiary held ownership interest in the dwelling.

Factors that would weight against the Commissioner allowing a longer period include:

•         waiting for the property market to pick up before selling the dwelling

•         delay due to refurbishment of the house to improve the sale price

•         inconvenience on the part of the trustee or beneficiary to organise the sale of the house, or

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

In your case, you had 2 years from the date of death, XX XX 20XX, to dispose of your 50% interest in the property to your sibling; however, the transfer only happened on XX XX 20XX.

You have stated that your intention was always to transfer your ownership interest in the property to your sibling, and that your parent had expressed the wish that your sibling became the sole owner. However, you were not aware of the provisions for the main residence exemption regarding capital gains tax and a deceased estate, and nor were you informed by your legal representative handling your mother's estate.

From the information supplied, and taking into account that the title to the property was transferred to your joint names in XX XX 20XX, it appears that there were not any matters beyond your control that prevented you from disposing of your share within the 2-year period. Further, it is considered that there was an unexplained period or periods of inactivity for a significant period of time.

Although we are sympathetic to your circumstances, the Commissioner is unable to exercise the discretion to extend the 2-year period to dispose of a dwelling under section 118-195 of the ITAA 1997.

Calculation of capital gain

You should note that only the capital gain from the date of death is subject to tax. That is, the first element of the cost base of the 50% ownership you disposed of will be market value of the property on the deceased's date of death in XX 20XX. This value will need to be compared to the market value of the property when you disposed of your share in XX 20XX.

As you held your ownership interest in the property for at least 12 months, you will be eligible to apply the CGT 50% discount.

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