Edited version of private advice

Authorisation Number: 1052168579671

Date of advice: 12 October 2023

Ruling

Subject: CGT - deceased estate

Question 1

Does the entire property (the Property) qualify for consideration for the exemption under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the Commissioner exercise the discretion under section 118-195 of the ITAA 1997 to allow an extension of time for the disposal of the portion of the Property consisting of the residential dwelling and the adjacent land used for private and domestic purposes in association with the residential dwelling, and disregard the capital gain made on the disposal of that portion?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Prior to 20 September 1985, the Deceased acquired the Property.

The Property size is less than 2 hectares.

The Property included a house with adjacent land which was the Deceased's principal place of residence.

The Property also contained industrial structures and land which was used to operate a business.

The Deceased left a Will (the Will).

The beneficiaries named in the Will were the Deceased's adult children (Beneficiary A and Beneficiary B).

The beneficiaries are the executors of the Estate.

The Will requested that the beneficiaries complete and register a plan of subdivision and thereafter transmit to Beneficiary A the lot in the plan upon which the dwelling is located, and to transmit to Beneficiary B the lot upon which the industrial shed is located.

If the plan of subdivision could not be registered the Will provided that the land was to continue to be held on trust as an undivided XX% share to Beneficiary A and the remaining undivided XX% share to Beneficiary B as tenants in common until the earlier of Beneficiary B ceasing to operate their business or attaining the age of XX. Beneficiary A was given exclusive right to occupy the dwelling. Beneficiary B was given the exclusive right to occupy the industrial shed for the purpose of operating their business.

After the Deceased's death, Beneficiary B did not want to sell their share of the Property whereas Beneficiary A wanted to sell their share. They could not see any other way of proceeding except to subdivide the Property as stipulated in the Will given that Beneficiary B had the right under the Will to continue to occupy their share of the Property for the purpose of operating their business.

In XX 20XX, Beneficiary A commenced the process of administering the estate and engaged with the Council to discuss the subdivision of the Property. Beneficiary A was advised by the Council to engage with the State Planning department. The State Planning department provided instructions and assistance to submit a boundary adjustment application to Council.

Between XX 20XX and XX 20XX, correspondence between Beneficiary A and the Council resulted in the Council advising that the boundary adjustment application could not be submitted until amendments to the State Environment Protection Plan (SEPP) were announced and gazetted.

In XX 20XX, the SEPP amendments were gazetted.

In XX 20XX, Beneficiary A engaged with a solicitor and the Council to seek advice on the process of submitting a boundary adjustment proceeding. Beneficiary A also engaged surveyors to prepare the boundary separation application and contracted an electrician for separation of electricity across the two properties if the boundary adjustment was allowed.

On XX XX 20XX, Grant of Probate was sealed and granted to Beneficiary A and Beneficiary B.

In XX 20XX, Beneficiary A lodged the boundary adjustment application.

In XX 20XX, the boundary adjustment was disallowed, with Council suggesting that the Estate lodge a formal Development Application.

At this time Beneficiary B still did not want to sell their share of the Property.

On XX XX 20XX, the Development Application was lodged.

In XX 20XX, the Development Application was rejected. One of the reasons for refusal was that the application did not adequately address the social impacts and potential conflict of having a dwelling with minimal buffers to rural industrial land used on an adjoining lot.

Following this decision, Beneficiary A attended a meeting with the Council and received advice from the Council that they would consider an adjustment to the Local Environment Plan (LEP). Council advised this process may take an extended time to finalise.

In XX 20XX, the Council advised that they estimated a further extended wait for an amendment to the LEP.

In XX 20XX, the Council had not adjusted the LEP. Given the inactivity of the Council and that it appeared that subdividing in accordance with the Will may not be possible, the executors decided to investigate the option of selling the Property. They engaged a valuer.

The valuation report details that the business which trades from the workshop on the Property, has been operating for many decades.

The executors still wished to subdivide if the Council would grant approval but in XX 20XX, the Council advised that they estimated a further extended wait for an amendment to the LEP. The executors decided that subdividing in accordance with the Will was not possible and committed to the sale of the Property.

On XX XX 20XX, the Property title was transferred to the executors.

On XX XX 20XX, the Estate entered a contract of sale on the Property.

On XX XX 20XX, settlement occurred.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-115

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Summary

The exemption provided under section 118-195 of the ITAA 1997 can only apply to a 'dwelling'. A 'dwelling' is defined as residential accommodation. It can also include adjacent land up to 2 hectares and adjacent structures if the land and structures were used primarily for private or domestic purposes in association with the residential accommodation.

In addition to a residential house, there were also industrial structures that were used for business purposes on the Property. The Deceased's Will indicates that XX% of the Property was used for residential accommodation purposes and XX% was used for business purposes.

Only the portion of the Property consisting of the residential dwelling and the part of the land used for private and domestic purposes in association with the residential dwelling may qualify for exemption under section 118-195 of the ITAA 1997. Having considered the circumstances in this case and the relevant factors the Commissioner will allow an extension of time for the disposal of this portion of the Property. Consequently, the capital gain made on the disposal of this portion of the Property can be disregarded.

Detailed reasoning

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.

Dwelling and adjacent land

A dwelling is defined in subsection 118-115(1) of the ITAA 1997 as:

(a)          a unit of accommodation that:

(i)            Is a building or is contained in a building; and

(ii)           which consists wholly or mainly of residential accommodation; and

(b)          a unit of accommodation that is a caravan, houseboat or other mobile home; and

(c)           any land immediately under the unit of accommodation.

However, subsection 118-115(2) of the ITAA 1997 explains that except as provided in section 118-120, a dwelling does not include any land adjacent to a building.

While the application of subsection 118-120(1) of the ITAA 1997 is to be determined at the time of any CGT event which happens to the dwelling, it is to the extent to which the land was used in association with the dwelling throughout the ownership period that is relevant.

Subsection 118-120(2) of the ITAA 1997 states that 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.

Taxation Determination TD 2000/15 Income tax and capital gains tax: what is meant by the phrase 'to the extent that' in subsection 118-120(1) of the Income Tax Assessment Act 1997 where it refers to 'land that is adjacent to a dwelling ... to the extent that you used the land primarily for private or domestic purposes in association with the dwelling as if it were a dwelling? details that the words 'to the extent' contemplate an apportionment if for some part of the ownership period the land has not been used 'primarily for private or domestic purposes in association with the dwelling'.

Whether or not the land is used primarily for private or domestic use for the entire ownership period is a test of fact and degree. Where the land has not been primarily used for private or domestic purposes for some or all of the ownership period some apportionment may be required when calculating a capital gain or a capital loss.

Section 118-120 of the ITAA 1997 also provides that an adjacent structure may also qualify as a dwelling if it was used primarily for private or domestic purposes in association with the residential accommodation.

Extension of time

In addition to the exemption only applying to a dwelling, another requirement for exemption is your ownership interest must end within two years of the deceased's death or a further period allowed by the Commissioner. Your ownership interest ends at the time of settlement of the contract of sale.

Practical Compliance Guideline PCG 2019/5 The Commissioner's discretion to extend the two-year period to dispose of dwellings acquired from a deceased estate provides guidance on factors we consider when deciding whether to grant the discretion.

Paragraph 3 of PCG 2019/5 provides that we will allow a longer period where the delay in the sale of the dwelling was due to reasons beyond your control. Also, factors favourable to allowing an extension include:

•                     An interest given in the will delays the disposal of the dwelling.

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

Application to your circumstances

In the present case, the Property consisted of a residential house that was used as the Deceased's main residence and also industrial structures that were used for business purposes. The Deceased's Will indicates that XX% of the Property was used for residential accommodation purposes and XX% was used for business purposes.

The portion of the Property consisting of the industrial structures and associated land that was used for business purposes does not fall within the definition of a 'dwelling' and therefore cannot qualify for exemption under section 118-195 of the ITAA 1997.

Only the portion of the Property consisting of the residential dwelling and the part of the land used for private and domestic purposes in association with the residential dwelling may qualify for the exemption but as it was disposed of outside of the two year period, an extension of time is required.

The delay primarily resulted from the clauses in the Will that stipulated that the Property was to be subdivided, and in lieu of this, provided to one of the beneficiaries a right to occupy the other portion of the Property. As the predominant reason for the delay was outside the control of the Estate, we will allow an extension of time.

Consequently, the exemption under section 118-195 of the ITAA 1997 will apply to the dwelling and the adjacent share of the land used in conjunction with the house for private and domestic purposes.

The structures and remaining share of the land associated with the industrial business do not satisfy section 118-120 of the ITAA 1997. Therefore, any capital gain or capital loss made in relation to that portion of the Property cannot be disregarded under section 118-195 of the ITAA 1997.

The capital gain on the Property will need to be apportioned on a reasonable basis and the exemption only applied to the dwelling and the associated share of the adjacent land situated with and under the dwelling that was used for private and domestic purposes.

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