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Edited version of your written advice
Authorisation Number: 1013060454705
Date of advice: 26 July 2016
Ruling
Subject: Capital gains tax
Question 1
Are you eligible for an exemption from capital gains tax?
Answer
No.
This ruling applies for the following periods:
Year ending 30 June 2016
The scheme commences on:
1 July 2015
Relevant facts and circumstances
The deceased died in 20XX.
The deceased purchased a property with their partner in 19XX. There partner lived in the property until they passed away in 200X and the deceased continued to live in the property until there death.
Probate was granted in 20XX.
At the time of death you were unable to prepare the house for sale.
The property required a significant amount of work to get it ready for sale, which included removing a significant amount of mechanical and building materials that had been acquired by the deceased.
You were approached by someone who indicated that they had some friends that required somewhere to live.
You believed that the property was not suitable for rent, however agreed to let the couple live in the property if they paid their own utilities.
This arrangement continued for some time until in 20XX you became dissatisfied with the arrangement due to deterioration of the state of the property and you became aware the tenants had not paid a utilities bill.
You asked your tenants to vacate the property in 20XX however they did not leave until sometime later.
You sold the property and settlement occurred in 20XX.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10,
Income Tax Assessment Act 1997 section 118-195
Income Tax Assessment Act 1997 subsection 118-195(1)
Reasons for decision
The capital gains provisions allow for concessional treatment to be given to a dwelling that was inherited through a deceased estate. Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines the conditions under which a capital gain or capital loss can be disregarded in this situation.
Any capital gain or capital loss made on the sale of such a dwelling is disregarded if the dwelling was:
• Acquired by the deceased before 20 September 1985, or
• The deceased's main residence when they died.
The Commissioner has the discretion to extend the two year period. This extension is generally only granted where the beneficiaries are merely arranging the ordinary sale of the dwelling and the cause of the delay is beyond their control. There must not be any other factors mitigating against exercising it.
The following is a non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion:
• the ownership of a property 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 (e.g. the taxpayer or a family member has a severe illness or injury), or
• settlement of a contract of sale over the property is unexpectedly delayed or falls through for reasons outside the beneficiary or trustee's control.
It is clear that the Commissioner's discretion is meant to be limited to situations where the owner is effectively prevented from selling the property. The intention of the two year period is to allow the orderly and timely sale of deceased's property.
In your case, you allowed others to reside in the property for a number of years. Within that time, the property significantly increased in value. The delay in the disposal of the property was contributed to by the actions, choices, and inactivity of you, the beneficiary of the deceased's estate. Activities could have been undertaken to ensure that the property had been disposed of within the two year period after the deceased had passed away.
While we acknowledge and appreciate the circumstances in relation the amount of work required to repair the property it was only when you became dissatisfied with arrangement between yourselves and your tenants that you began to take the necessary steps to dispose of the property.
Consequently, the Commissioner considers that there were no legal or physical impediments that prevented the disposal of the property within the two year period from the date the deceased passed away.
Having considered the relevant facts, the Commissioner will not apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit.