Edited version of your private ruling

Authorisation Number: 1012605564363

Ruling

Subject

Capital gains tax - deceased estate - Commissioner's discretion to extend the two year period - main residence exemption

Question

Will the Commissioner exercise discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to the two year period?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2014.

The scheme commences on

1 July 2013.

Relevant facts and circumstances

Your sibling (the deceased) and their spouse purchased a property prior to 20 September 1985, which they established as their main residence.

When the deceased's spouse passed away their interest in the property passed to them.

The deceased continued to reside in the property until they were placed in respite care more than nine years go.

The deceased moved into a nursing home more than nine years ago.

The property was rented out from the time the deceased moved into nursing home until the deceased's death more than two years ago.

The deceased had elected to continue to treat the property as their main residence until their death.

You are the sole beneficiary of their estate.

The title to the property was transferred into your name late last year.

Early this year you signed an agreement with a real estate agent to place the property on the property market.

A Contract for Sale of the property was signed late last month.

Settlement is expected to occur at the end of this month.

You have recently obtain advice that to obtain a full exemption from capital gains tax (CGT) you should have disposed of the property within two years of the deceased's date of death.

Your grounds for an extension of two year time period being granted to you are as follows:

• the property was not transferred to you as a beneficiary of the deceased's estate until late last year

• the property was placed on the property market early this year, less than 20 days after the two year timeframe ceased

• a Contract for Sale of the property was signed late last month, less than 50 days after the two year timeframe ceased, and

• you were not executor of the deceased's estate and had no power over the time it took to properly administer the estate.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 118-130(3)

Income Tax Assessment Act 1997 section 118-195

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

Reasons for decision

A capital gain or capital loss is 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 beneficiary of a deceased estate or you owned it as the trustee of the deceased estate.

The availability of the exemption is dependent upon:

• who occupied the dwelling after the date of the deceased's death, or

• whether the dwelling was disposed of within two years of the date of the deceased's death.

For a dwelling acquired by the deceased, 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 relevant 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 that person disposed of the dwelling in their capacity as beneficiary, or

• your ownership interest ends within two years of the deceased's death.

In your case, when the deceased died, the property passed to you. The property had been the deceased's main residence during their ownership period, and at that time, was being used to produce assessable income. However, the property was not occupied by a relevant individual after the deceased's death and therefore this basis of exemption is not available.

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 property 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, thus this alternative basis of exemption in the provision may apply.

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.

You can choose to treat a dwelling as your main residence even though you no longer live in it. If you use it to produce assessable income you can choose to treat it as your main residence for up to six years after you stop living in.

In your case, the property had been rented out for a period of more than seven years. Therefore, at the time of the deceased's date of death, the property is not considered to be her main residence.

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

The normal CGT rules will apply to the disposal of the property

CGT

The most common CGT event, CGT event A1, occurs when you dispose of an asset to another entity. The time of the event is when you enter into the contract for disposal of it, or if there is no contract when the change of ownership occurs.

If two or more people acquire a property asset together it can be either tenants in common or as joint tenants.

If a tenant in common dies, their interest in the property is an asset of their deceased estate. This means it can be transferred only to a beneficiary of the estate to be disposed of (or otherwise dealt with) by the trustee/s of the estate.

Deceased estate - main residence

Special rules apply to the asset that was deceased person's main residence. If you inherit a deceased person's dwelling, you may be exempt or partially exempt when a CGT event occurs to it.

Information on how CGT applies is available on our website - www.ato.gov.au.