Edited version of private advice

Authorisation Number: 1012638709649

Ruling

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

Question 1

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

Yes

This ruling applies for the following periods:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The deceased acquired a property and lived in it as their main residence.

The deceased went missing a few years ago.

The coroner pronounced the deceased death in the 20XX financial year.

The date of death was backdated to the date when the deceased went missing

Up until the disappearance the property was the deceased's principal residence.

Since the disappearance, the property had been let out and the net income was included in the deceased's personal returns.

In the 20YY financial year the property was sold in accordance with the deceased's will.

You signed a contract for sale and the settlement date was in the 20YY financial year

The delay in sale was due to circumstances outside your control

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 was pronounced dead, an interest in the property passed to you. The property was the deceased's main residence prior to death, and at that time, was not 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.

In your case, the settlement of contract of sale over the dwelling was unexpectedly delayed for reasons outside your control. Since the disappearance of the deceased, the property had been let out and the net income was included in their personal returns.

Having considered the relevant facts, the Commissioner is able to apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit.