Edited version of your written advice

Authorisation Number: 1013066633662

Date of advice: 8 August 2016

Ruling

Subject: Capital Gains Tax

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, for the portion of the property that was a pre capital gains tax (CGT) asset of the deceased?

Answer

Yes

Question 2

Will the Commissioner exercise discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension of time to the two year period for the main residence on 2 hectares?

Answer

Yes

Question 3

Will the Commissioner exercise his discretion under subsection 152-80(3) of the ITAA 1997 and allow extra time for you to apply the small business CGT concessions?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

The property was purchased prior to 20 September 1985 by joint tenants.

Spouse died post 20 September 1985 and left client the sole owner of the property since then.

They went into aged care, and then died leaving X acres (X hectares)

One of their close relations was diagnosed with a serious illness shortly after the passing.

The beneficiaries signed with a real estate agent but due to a natural disaster shortly after, there was substantial damage which took months to finalise with insurance. This meant that the property required some work before it was fit for sale.

The property has settled.

The land would have qualified for the small business CGT concessions if the deceased had disposed of the land immediately before their death.

The land was used for farming for more than fifteen years.

There has been share farming income since which has been declared in the estate tax return.

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).

Income Tax Assessment Act 1997 section 152-80 and

Income Tax Assessment Act 1997 subsection 152-80(3).

Reasons for decision

Question 1 and 2

Subsection 118-195(1) of the ITAA 1997 states that if you own a dwelling in your capacity as trustee of a deceased estate (or it passed to you as a beneficiary of an estate), then you are exempt from tax on any capital gain made on the disposal of the property if:

• the property was acquired by the deceased before 20 September 1985, or

• the property was acquired by the deceased on or after 20 September 1985 and the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income, and

• your ownership interest ends within 2 years of the deceased's death (the Commissioner has discretion to extend this period in certain circumstances).

You have an ownership interest in a property if you have a legal interest in the property. This means that if you sell a property, your ownership interest continues until the date of settlement (rather than the date the contract of sale is signed).

In this case, the deceased and their late spouse purchased the property before 20 September 1985. The deceased's spouse passed away in 19XX and the deceased became the sole owner of the property. Therefore, the deceased held a 50% pre CGT interest and a 50% post CGT interest in the property. The property was their main residence until they passed away. The property was not sold within 2 years of the deceased's date of death.

You will only be able to disregard the capital gain from the sale of the property if the Commissioner extends the 2 year time period.

The Commissioner can exercise his discretion in situations such as where:

• 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

Having considered the circumstances and the factors outlined above, the Commissioner is able to apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension of time until dd/mm/yyyy.

Therefore, the 50% pre CGT interest held by the deceased will be fully exempt from CGT and the remaining 50% post CGT portion would be exempt up to the maximum two hectares allowed under the CGT main residence exemption.

Question 3

When a taxpayer acquires a CGT asset, including acquisition by inheritance, they are potentially liable for tax on any capital gain on that asset when a CGT event subsequently happens to it.

Section 152-80 of the ITAA 1997 allows either the legal personal representative of an estate or the beneficiary to apply the small business CGT concessions in respect of the sale of the deceased's asset in certain circumstances.

Specifically, the following conditions must be met:

• the asset devolves to the legal personal representative or passes to a beneficiary, and

• the deceased would have been able to apply the small business concessions themselves immediately prior to their death, and

• a CGT event happens within 2 years of the deceased's death unless the Commissioner extends the time period in accordance with subsection 152-80(3) of the ITAA 1997.

In this case, the asset has passed to the legal personal representative and the deceased would have been able to apply the small business concessions to the property just prior to their death.

In determining if the Commissioner should use his discretion to allow an extension of time the following will be considered:

• evidence of an acceptable explanation for the period of the extension requested (and whether it would be fair and equitable in the circumstances to provide such an extension)

• prejudice to the Commissioner which may result from the additional time being allowed (but the mere absence of prejudice is not enough to justify the granting of an extension)

• unsettling of people, other than the Commissioner, or of established practices

• fairness to people in like positions and the wider public interest

• whether any mischief is involved, and

• consequences of the decision.

In this case the property was listed with a real estate agent. A few periods later, the property was damaged by a natural disaster and it wasn't until several months later that the insurance claim was finalised.

Having considered the relevant facts, the Commissioner is able to apply his discretion under subsection 152-80(3) of the ITAA 1997 and allow an extension to the time limit. Allowing an extension is not prejudicial to the Commissioner in this case nor is it unfair to other people in similar positions.