Edited version of your written advice

Authorisation Number: 1013071443707

Date of advice: 17 August 2016

Ruling

Subject

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

Question

Will the Commissioner exercise his 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 until settlement?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2016.

The scheme commences on

1 July 2015.

Relevant facts

The deceased acquired a residential property prior to 19 September 1985.

The dwelling was the main residence of the deceased for all of the ownership period.

The deceased passed away in 20XX.

The dwelling was the main residence of the deceased for all of their ownership period.

The property was first used to earn rental income from a few months after the deceased's death.

You were a joint executor of the deceased's will, as well as a beneficiary of the estate.

Title to the property was transferred to you and another beneficiary (the other beneficiary) as joint tenants.

In 20XX a planning application was submitted to Council in order to facilitate sale of the dwelling.

The other beneficiary took responsibility for the planning process.

During the 20XX year the other beneficiary lost legal capacity.

External administrators (the administrators) were appointed to manage the other beneficiary's affairs.

You agreed that the property should be sold to finance the other beneficiary's expenses.

An adverse possession application related to the development of the property was lodged in late 20XX.

The administration of the other beneficiary's affairs was complicated due to business and jointly held interests.

The administrator's preference was to finalise the other beneficiary's financial matters before proceeding with the sale of the dwelling. The administrator agreed to the sale in July 20XX.

The sale of the property was settled in October 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

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

Summary

The Commissioner will exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time until settlement.

Detailed reasoning

The capital gains provisions allow for concessional treatment to be given to a dwelling that was owned by a deceased person if the executors of the deceased person's estate sell that dwelling within two years of the date of death.

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 executors are merely arranging the ordinary sale of the dwelling and the cause of the delay is beyond their control (for example, if the will is challenged). There must not be any other factors mitigating against exercising it.

Whether the Commissioner will exercise his discretion under subsection 118-195(1) of the ITAA 1997 will depend on the facts of each case.

Factors which the Commissioner may consider in determining whether to exercise the discretion include, but are not limited to situations 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.

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 property.

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

Application to your circumstances

In your case, the timely sale of the property has been affected by another beneficiary suffering unforeseen or serious personal circumstances arising during the two-year period.

We have considered the fact that the property was used to produce rental income for a period just prior to, and after the deceased passed away. In this instance, this does not result in capital gains tax implications.

You commenced the process of preparing the property for sale after title passed to you. The other beneficiary was in control of obtaining the relevant permits and applications to facilitate the sale. At that time you considered that the property would be sold within the two year time limit.

In 20XX the other beneficiary lost legal capacity. During this time, you were unable to obtain instructions in order to effect the sale of the property.

An external administrator was appointed to manage the other beneficiary's financial and legal affairs. The preference of the administrator was to finalise other financial matters before agreeing to the sale of the property in July 20XX.

The Commissioner accepts that the external administration of the other beneficiary's affairs has presented a significant legal impediment to the timely disposal of the property. Accordingly, it is appropriate to grant the extension of time that you have requested.