Edited version of your written advice

Authorisation Number: 1012858126237

Ruling

Subject: Capital gains tax - deceased estate - subdivision - Commissioners discretion

Issue 1

Question 1:

Does the main residence exemption apply to adjacent land disposed of without a dwelling?

Answer:

No.

Question 2:

Can you disregard the capital gain made on the disposal of the vacant block of land?

Answer:

No.

Issue 2

Question

Will the Commissioner exercise his discretion and extend the two year time limit in which the Trustees could have disposed of the property for the purposes of section 118-195 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period

Income year ending 30 June 2015.

The scheme commences on

1 July 2014.

Relevant facts and circumstances

The deceased was involved in an accident and had experienced permanent physical injuries from the accident.

The deceased purchased a property (the property) after 20 September 1985, which had an existing dwelling located on it (the dwelling).

The dwelling was modified and furnished to accommodate the deceased's physical condition.

The dwelling was the deceased's principal place of residence from the time it was purchased until the deceased passed away a number of years later, and had remained vacant following their passing.

The deceased's last will named two trustees.

An application for probate was lodged with the Probate Registry around four months after the deceased had passed away and probate was granted around seven months later.

The administration of the deceased's estate was finalised about four months after probate was granted.

The deceased had submitted a subdivision submission, which they had been unable to fulfil due to ill health. A subdivision submission was resubmitted due to the original submission lapsing.

The property was subdivided around X months after the deceased passed away resulting in:

• Lot A, with the existing dwelling located on it; and

• Lot B, a vacant block of land.

For a period of around two years the deceased's dwelling had been renovated to remove all aspects of the dwelling that had been modified to accommodate the deceased's physical condition and other repairs to prepare the dwelling for sale. The repairs were commenced about X months after the deceased passed away until around X months after the deceased passed away.

Lot B, the vacant block of land was put on the market in around X months after the deceased passed away. A contract for the sale of Lot B was entered into during the same month.

Lot A, with the existing dwelling, was put on the market around X months after the deceased had passed away. A contract for the sale of Lot A was entered into during the same month with settlement to occur around two months later.

For the purposes of this private ruling, a capital gain has been made on the disposal of both Lot A and Lot B.

You submit that the delay in disposing of the property was due to:

• probate taking a long time. from the date the deceased passed away to the estate being handed to the executors was around X months,

• finance needed to be organised so that the repairs to the dwelling could be undertaken to ready the dwelling for sale. One of the beneficiaries of the deceased's estate had obtained a loan so that the repairs on the dwelling could be undertaken, which had taken some time,

• repairs on the dwelling took time to complete due to other commitments; and

• the subdivision approval took some months to come through.

You have provided copies of documentation, which should be read in conjunction with, and forms part of the scheme of this private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 115-5

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 115-15

Income Tax Assessment Act 1997 Section 115-20

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 115-100

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-120

Income Tax Assessment Act 1997 Section 118-160

Income Tax Assessment Act 1997 Section 118-165

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

Reasons for decision

Issue 1

Main residence exemption and land adjacent to your dwelling

Capital gains tax (CGT) is tax you pay when a CGT event happens to a CGT asset, such as land.  The most common CGT event is CGT event A1, which occurs when you dispose of your ownership interest in a CGT asset to another party, such as when you sell the land (section 104-10 of the ITAA 1997).

Generally, you can ignore a capital gain or capital loss you make from a CGT event that happens to a dwelling that is your main residence (section 118-110 of the ITAA 1997). 

The main residence exemption can include land adjacent to the dwelling to the extent that it is used primarily for private or domestic purposes in association with the dwelling.  The maximum area of land that is covered by the main residence exemption, including the area under the dwelling, must not exceed 2 hectares (section 118-120 of the ITAA 1997).

If you dispose of adjacent land to the same person at the same time as you dispose of your main residence, the exemption extends to the adjacent land. However, if you dispose of adjacent land at a different time than you dispose of your main residence, the exemption does not apply to the adjacent land (section 118-165 of the ITAA 1997). 

If your main residence is accidentally destroyed and you then dispose of the vacant land on which it was built, you can choose to apply the main residence exemption as if the dwelling had not been destroyed and continued to be your main residence (section 118-160 of the ITAA 1997).

Application to your situation

In your case, the property had been subdivided, with the deceased's main residence dwelling located on Lot A, and Lot B being a vacant block of land.

The lots were put on the market separately during different months. The contracts of sale for the Lots were entered into during different months and the purchasers were different parties.

CGT event A1 occurred when you disposed of Lot B. However, this CGT event did not happen to Lot A on which the deceased's main residence was located. While Lot A was also sold, the two lots were not sold under the same contract and the vacant block of land cannot be viewed as being disposed of with a dwelling.

Also, as no existing dwelling had been destroyed on the Lot B, you are not eligible for this exemption to disregard any capital gain made on the disposal of Lot B under section 118-160 of the ITAA 1997.

It is the Commissioner's view that you are not entitled to any exemptions or exceptions in relation to the disposal of the vacant block of land. Therefore, you cannot disregard the capital gain made on the disposal of Lot B.

Further issues for you to consider

The following information is provided as written guidance. A taxpayer who relies on guidance will remain liable for any tax shortfall if the guidance is incorrect or misleading and they make a mistake as a result (unless a time limit imposed by the law precludes the liability). However, they will be protected against the shortfall penalty and interest on the tax shortfall provided they relied on that guidance reasonably and in good faith.

If you acquire a dwelling the deceased had owned, and the dwelling passes to you after 20 August 1996, and it was the main residence of the deceased immediately before they passed away, the first element of the cost base of the dwelling is its market value at the date the deceased passed away.

If a taxpayer subdivides a block of land, each block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets.

Taxation Determination TD 97/3 provides that the Commissioner will accept any "reasonable" method of apportioning the original cost base between the new blocks.

A reasonable apportionment of the cost of the land itself can usually be achieved on an area basis if all the land is of a similar size and market value or on a relative market value basis if this is not the case.

However, expenditure forming part of the cost base of the asset is not apportioned if that amount is wholly attributable to a particular asset. For example, if a dwelling existed on an original block of land before it was subdivided into two blocks, the cost of the dwelling would only be included in the cost base of the block on which the dwelling stands.

If the blocks are of unequal market value the Commissioner considers that costs such as survey, legal fees and application fees associated with the subdivision should be apportioned in accordance with relative market values of the blocks.

If the conditions for the 50% CGT discount as outlined in Division 115 of the ITAA 1997 are met, you will be entitled to reduce the capital gain made on the disposal of Lot B by 50% when determining the net capital gain made in relation to the disposal of Lot B.

Issue 2

Commissioner's discretion under section 118-195 of the ITAA 1997

In certain circumstances, section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the trustee of a deceased estate may disregard an assessable gain or loss made from the disposal of a dwelling that passed to them in their capacity as trustee of a deceased estate.

In relation to dwellings acquired by a deceased person before 20 September 1985, but who passed away after that date, one of the circumstances for the exemption under section 118-195 of the ITAA 1997 to apply is that the dwelling needs to be disposed of by the trustee within two years of the date of death.

In 1986, an Explanatory Memorandum (EM) was released which introduced CGT with the exemption period of 12 months. This meant that trustees or beneficiaries of a deceased estate had 12 months from the date of the deceased passing away to dispose of an inherited dwelling to be eligible for the exemption. The intention behind this legislation was that the inherited dwelling was to be immediately sold after the date the deceased passed away.

This period was extended to two years from 1996 to allow for situations where the trustees or beneficiaries of a deceased estate had difficulty arranging an orderly sale of the deceased's dwelling within the current 12 month period. This extension gave trustees and beneficiaries more time to make appropriate arrangements by extending the period by 12 months.

However, the Commissioner has the power under section 118-195 of the ITAA 1997 to extend the two year period to dispose of an inherited dwelling in relation to CGT events that happened in the 2008/09 year and later income years in accordance with the EM to the Bill that added the discretion to section 118-195 of the ITAA 1997, (the Tax Laws Amendment (2011 Measures No 9) Bill 2011). This enables a trustee or beneficiary of a deceased estate to apply to the Commissioner to grant an extension of the two year time period to dispose of the deceased's dwelling, where the CGT event happens in the 2008-09 income year or later income years.

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); or

• settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control.

These examples are not exhaustive, but provide guidance on what factors the Commissioner would consider reasonable to exercise his discretion to extend the two year period to dispose of an inherited dwelling.

In exercising the discretion the Commissioner will also take into account whether and to what extent the dwelling is used to produce assessable income and for how long the trustee or beneficiary held the ownership interest in the dwelling. 

Whether the Commissioner will exercise his discretion under subsections 118-195(1) and 118-200(3) will depend on the facts of each case.

Other factors which may be relevant include but are not limited to:

• the sensitivity of personal circumstances of the beneficiary and other surviving relatives of the deceased; and

• the degree of difficulty in locating the beneficiary to prove the will.

The relevance and weight to be given to each of the factors described above will depend upon the circumstances of each particular case.

Examples of reasons considered not to be acceptable for exercising the Commissioner's discretion may include:

• waiting for the property market to pick up before selling the house,

• 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.

It is considered that the trustee has a choice in the situations described above. Accordingly, the Commissioner would not exercise the discretion under those circumstances.

Application of the Commissioner's discretion to your situation

In this case the Commissioner has decided not to exercise his power to extend the two year period available to the trustee of the deceased estate to dispose of the inherited property for the purposes of section 118-195 of the ITAA 1997.

When making our decision we have taken the following into consideration when making our decision:

• we have not been advised that the deceased's will was challenged in this situation,

• based on the information provided it is not viewed that the deceased's estate was complex,

• we have not been advised that the Trustees of the deceased's estate had any personal circumstances during the two years after the deceased passed away which would have impacted on their ability to dispose of the deceased's dwelling within the two year period,

• probate on the deceased's estate occurred around 10 months after the deceased passed away. However, while we accept that the dwelling needed some repairs to put it in a more saleable position, the choices made by the Trustees and/or the family of the deceased, have delayed the disposal of the deceased's dwelling,

• you have stated that the repairs on the deceased's dwelling had taken time to complete due to other commitments. However, you have not provided an explanation of what those commitments were, who was affected by those commitments, or how they had delayed the repairs being undertaken on the dwelling,

• the choice to subdivide the property into two lots and sell them separately had caused a delay in the disposal of Lot A, with the subdivision of the property occurring over X months after the deceased had passed away, and

• it was the deceased's family and/or the Trustee's choice as to how the activities were undertaken in relation to the property and the ultimate disposal of Lot A. We have not been advised of any reasons outside of the Trustee's control which contributed to the delay in the disposal of the deceased's dwelling or provided a sufficient reason as to why the dwelling could not have been disposed of at an earlier date.

After considering the facts of this situation, it is viewed that the delay in the administration of the deceased's estate was contributed mainly by the choices made by the Trustees of the deceased's estate and/or the beneficiaries of the deceased estate.

While it is reasonable for repairs to be undertaken in relation to getting an inherited dwelling ready for sale, it is the time involved the getting the property on the market and the actions of the trustees and beneficiaries of the deceased's estate that we take into consideration when determining whether the Commissioner's discretion will be exercised.

In this case the choice to subdivide in itself is not the issue. The issue is the period of time it took for the subdivision to occur after the deceased passed away. It could be viewed that the delay in the dwelling occurred due to the Trustees/beneficiaries determining that they would receive a larger amount if the property was subdivided. As outlined above, choices made by the trustees/beneficiaries to delay the disposal of an inherited dwelling for the purpose of obtaining a greater return on the disposal of the inherited dwelling will not be viewed as a reason for the Commissioner to exercise his discretion to extend the two year period to dispose of the inherited dwelling.

Based on the information and documentation provided with the private ruling, it has been determined that the Commissioner's discretion will not be exercised to extend the two year period as it is viewed that the facts of your situation are not of a nature that would be acceptable for the exercising of the Commissioner's discretion.

Therefore, any capital gain made on the disposal of Lot A cannot be disregarded.

Further issues for you to consider

The following information is provided as written guidance. A taxpayer who relies on guidance will remain liable for any tax shortfall if the guidance is incorrect or misleading and they make a mistake as a result (unless a time limit imposed by the law precludes the liability). However, they will be protected against the shortfall penalty and interest on the tax shortfall provided they relied on that guidance reasonably and in good faith.

In accordance with section 118-200 of the ITAA 1997, a partial exemption of the capital gain or capital loss made on the disposal of an ownership interest in a dwelling that passed to an individual as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate and section 118-195 of the ITAA 1997 does not apply.

As the Commissioner has not exercised his discretion to extend the two year period to dispose of the property under section 118-195 of the ITAA 1997, the capital gain made on the property from the date the deceased passed away until the property is disposed of will be taxable.

As section 118-195 of the ITAA 1997 does not apply to your situation, you may be entitled to a partial exemption of the capital gain or capital loss made on the disposal of the property under section 118-200 of the ITAA 1997.