Edited version of your written advice

Authorisation Number: 1051232552198

Date of advice: 14 June 2017

Ruling

Subject: Dwelling acquired from a deceased estate

Question 1

Are you able to disregard any capital gain or loss under sub section 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) on the disposal of a part ownership interest in a dwelling that passed to you as a beneficiary of your Parent’s estate?

Answer

No

Question 2

Will the Commissioner exercise discretion under subsection 118-195() of the Income Tax Assessment act 1997 (ITAA 1997) and allow an extension of time to the two year period until DDMMYY?

Answer

No

This ruling applies for the following periods:

Income year ending 2016

The scheme commences on:

1 July 2006

Relevant facts and circumstances

Your parents resided together in the family home before separating in 200X.

Following the marriage breakdown, one parent purchased dwelling known as dwelling M.

The other parent resided in portable rental housing in a holiday village.

The parent who owned dwelling M passed away in 200X (the deceased).

Ownership of dwelling M passed to you and your siblings, with each of our inheriting a 25% ownership interest in dwelling M.

You stated that whilst your parents had separated, they were legally married and the parent living in portable rental housing, resided periodically with the deceased, performing domestic duties, attending social functions with the deceased and other family and friends and when the deceased was seriously ill, stayed regularly at the deceased’s house.

Following the deceased’s passing in 200X, you and your siblings allowed your remaining parent to reside in dwelling M from 200X until 201X.

Your remaining parent resided in the dwelling M without paying any rent and was closer to the family who provided support and care.

Your remaining parent passed away in 201X.

In late 201X, you transferred your 25% ownership interest to a sibling and the other two siblings did so as well, resulting in one of your siblings acquiring a 100% ownership interest in the dwelling.

Settlement of the purchase of the dwelling occurred in early 201Y.

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

Question 1

Summary

As the spouse of the deceased didn’t occupy the deceased’s residence as a main residence immediately before the deceased’s death, a capital gain cannot be disregarded under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) when your part ownership interest is transferred to your sibling.

Detailed reasoning

A capital gain or capital loss is disregarded under section 118-195 of the ITAA 1997 where a capital gains tax event happens to a dwelling if it passed to you as an individual beneficiary of a deceased estate or you owned it as the trustee of the deceased estate.

The availability of the exemption is dependent upon:

● who occupied the dwelling after the date of the deceased's death, or

● whether the dwelling was disposed of within two years of the date of the deceased's death.

For a dwelling acquired by the deceased, you will be entitled to a full exemption if:

● the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of the following relevant individuals:

● the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased)

● an individual who had a right to occupy the dwelling under the deceased's will, or

● an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary.

In your case, when the deceased died, a quarter of the ownership interest in the dwelling passed to you. The property was the deceased’s main residence prior to death, and at that time, was not being used to produce assessable income.

However, during the period from the deceased’s death in 200X until the end of your ownership period in 201Y the dwelling was not the main residence of the spouse of the deceased (the deceased was separated from their spouse who resided elsewhere at the time of death), or an individual who had the right to occupy the home under the Will, or an individual who was a beneficiary of the deceased estate.

Therefore, you do not satisfy the conditions for an exemption to apply, and you cannot disregard any capital gain or loss made on the disposal of your share of the dwelling.

Question 2

Summary

The Commissioner will not exercise the discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension.

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.

The following is a non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion:

● 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 reasons outside the beneficiary or trustee's control.

In determining whether or not to grant an extension the Commissioner is also expected to consider whether and to what extent the dwelling is used to produce assessable income and how long the trustee or beneficiary held it.

In your case there has been no challenge to the Will, the estate is not complex, and no other reasons have been provided that contributed to the delay in attending to the sale of the deceased’s dwelling.

Having considered the relevant facts, the Commissioner is unable to apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit.