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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1051241050427

Date of advice: 22 June 2017

Ruling

Subject: Capital gains tax – extending two year period

Question 1

Will the Commissioner exercise the discretion under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) and extend the two year time period until settlement date?

Answer

No

This ruling applies for the following period:

30 June 20A7

The scheme commences on:

1 July 20A6

Relevant facts and circumstances

Property was acquired as joint tenants in 19A1.

One of the joint tenants passed away in 19A2 at which time the other joint tenant acquired the remaining 50% of ownership interest in the property.

The total size of the property is more than 2 hectares and contained a granny flat not used for income producing purposes.

The surviving joint owner suffered medical conditions and required a full-time carer to assist in administering their affairs.

A beneficiary resided in the granny flat, from approximately 19A3 until 20A4 and vacated the granny flat in or around 20A4.

Another beneficiary moved into the main residence to be the full-time carer from 20A4 until the property was settled in 20A7.

The surviving joint owner (the deceased) passed away in 20A5 and probate was granted in 20A5.

The deceased had occupied the property as their main residence up until their date of death and the dwelling formed part of the residuary estate.

The deceased had XX children and were all equal beneficiaries (unless otherwise stated in the will).

The trustees agreed that until the dwelling was sold it could be occupied by one of the beneficiaries.

The deceased’s will provide the following directions:

    ● appointed two executors and trustees

    ● listed specific personal items to be distributed to the nominated XX beneficiaries

    ● one beneficiary be permitted to reside in the granny flat until the property is sold and

    ● postpone the sale of the estate or any part of it without the beneficiaries and trustees being liable.

The distribution of the personal items took several months to finalise between the XX beneficiaries.

One of the beneficiaries inherited large items. These items were stored in a shed located on the property. No other person, beneficiary or executor had access to this area, other than this beneficiary.

This beneficiary had no funds to relocate these items to be stored in another facility and stored these items in this shed on the property from 20A5 up until on or around mid 20A6.

The property could not be sold with vacant possession until these items were removed.

In 20A8, the executors received a letter from their state Government, advising the rezoning process had been finalised in 20A8 in their area.

The executors are of senior age and have had their own health issues over the past few years.

One beneficiary was diagnosed in 20A8 with an illness and continued to reside in the property until sold.

In 20A6, one of the beneficiaries engaged a lawyer to have the executors sell the property or legal proceedings would commence to have the property sold.

The property went to auction and sold mid to late 20A6 and settled early 20A7.

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

Any capital gain or loss that arises subsequently may be disregarded if section 118-195 of the ITAA 1997 is satisfied.

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).

In this case, the deceased held two 50% interests in the property, one acquired pre CGT and the other acquired post CGT from the death of the other joint tenant. The property was the deceased’s main residence just before date of death and it was not being used for the purpose of producing assessable income. However, the property was not disposed of within the 2 years of the deceased’s death.

Commissioner may extend the 2 year period

A trustee or beneficiary of a deceased estate may apply to the Commissioner to grant an extension of the two-year period, where the CGT event happens in the 2008–09 income year or later income years. Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example:

    ● 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)

    ● 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.

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

Note that we must consider the extension to the settlement date rather than the contract date. This is because the legislation requires the trustee or beneficiary to 'dispose of their ownership interest’ which does not occur until settlement.

Examples of where the Commissioner has not exercised the discretion:

    ● property not placed on the market for sale until after 2 years has passed (and no valid reason given for delay)

    ● improvements/renovations carried out to increase market value prior to sale

    ● subdivision undertaken by the executors which is not contemplated or required by the deceased’s will

    ● a beneficiary has been allowed to live in the property by the executor but this is not expressly provided for in the will.

Application to your circumstances

In this case, the deceased passed away in 20A5. The sale of the property did not take place until more than seven years after the deceased’s date of death.

There was 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 beneficiary or trustee’s control.

The trustees exercised their discretion to allow a beneficiary live in the property although this is not expressly provided for in the will. This does not affect the factors the Commissioner considers when deciding whether or not to exercise his discretion.

While we appreciate your circumstances and the reasons you provided, the Commissioner is unable to exercise his discretion to extend the 2 year time limit.