Edited version of your written advice

Authorisation Number: 1013121247664

Date of advice: 8 November 2016

Ruling

Subject: Capital gains tax

Question 1

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 in relation to the sale of the main residence?

Answer

No.

Question 2

Will the Commissioner exercise his discretion under subsection 152-80(3) of the ITAA 1997 to extend the time limit to allow a small business capital gains tax (CGT) concession in relation to the capital gain resulting from the sale of the property?

Answer

No.

This ruling applies for the following period

Year ending 30 June 201X

The scheme commenced on

1 July 201X

Relevant facts

The house was the main residence of the deceased since purchase until their death. The main residence was not used for the purpose of producing assessable income.

Additional land on the same title was run as a business until the land was used for primary production purposes.

It was the wish of the deceased that entity A was offered first right of refusal when the property was sold. The family honoured this wish and a sale of agreement was agreed upon, subject to entity A selling another property.

After a period of time, one of the Executors enquired about the purchasing of the property, at which point the family were advised that as the third party had not been able to sell the property required to trigger the sale agreement, it was no longer their intention to purchase the property.

At this point in time it was discovered that the property was in a state of disrepair and would therefore be worth far less than was first anticipated.

An opportunity arose to lease the property to entity B, who as part of the agreement, would at the end of the lease, return the property to a better condition. In order to agree to this, a minimum X year lease was required by entity B.

The family agreed to this as it provided a return and also a no cost way to return the property to a better condition. The property was on the market at this time subject to the lease.

At the end of the X years, the lease was not renewed and the property was sold as being restored.

The property was sold more than X years after the date of death.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 152-80

Reasons for decision

Main residence exemption

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 property was the main residence of the deceased until they passed away.

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

In this case, the deceased estate agreed to follow the deceased wishes and let the specified person purchase the property. However, when this fell through, the deceased estate agreed to lease the property for X years to get the property into a more marketable position.

It is acknowledged that the property was in a state of disrepair and the property was worth less than was first anticipated, however, there has been no challenge to the Will, the estate was not complex, there were no unforseen or serious personal circumstances that prevented the sale, and the delay in selling the property is not due to circumstances beyond the trustee's control. It is considered that the property could have been sold soon after finding out the initial sale fell through, even if at a lower price than originally expected.

While we appreciate your circumstances, the hope for a higher price for the property is of a different nature to the situations in which the Commissioner can exercise his discretion. Having considered the relevant circumstances, the Commissioner will not exercise his discretion and extend the 2 year time limit.

Small business concessions

Under Division 152 of the ITAA 1997, the small business concessions are available to reduce a capital gain providing certain conditions are satisfied.

When an individual dies, section 152-80 of the ITAA 1997 allows their legal personal representative or a beneficiary of their estate to access the small business CGT concessions to the extent that the deceased would have been able to access them just before they died, provided the following conditions are met:

● that the CGT asset forms part of the estate of a deceased individual

● the asset devolves to the individual's legal personal representative or passes to a beneficiary of the individual

● the individual would have been entitled to reduce or disregard the capital gain under Division 152 of the ITAA 1997 if a CGT event had happened in relation to the CGT asset immediately before his death, and

● a CGT event happens in relation to the CGT asset within two years of the individual's death.

This two year time limit may be extended by the Commissioner under subsection 152-80(3) of the ITAA 1997.

In determining whether the discretion to allow further time would be exercised, the Commissioner has considered the following factors:

● 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.

The Commissioner is able to apply an extension of time where there is a reasonable explanation for an extension.

The original two year period to dispose of an asset after the date of death of a loved one is not considered inadequate time to dispose of an asset.

The duration of the extension being sought is more than twice the ordinary period allowed in the legislation. This is a considerable period and an extension would only be considered when there are exceptional circumstances.

Whilst we acknowledge the specific circumstances in relation to the property including the wishes of the deceased and its subsequent state of disrepair, this does not constitute the exceptional circumstances needed to extend the two year time period to dispose of the asset to more than four years.

The choice to enter into a X year lease on the property in the hope to get a better price for the property is not considered to be an acceptable explanation for the Commissioner to exercise his discretion.

An extension would not be granted to other taxpayers in similar circumstances. It would be considered unfair to other taxpayers to allow such a lengthy extension.

Accordingly, the Commissioner will not exercise his discretion under subsection 152-80(3) of the ITAA 1997 to extend the time period.