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Edited version of your written advice
Authorisation Number: 1051322464283
Date of advice: 20 December 2017
Ruling
Subject: Capital gains tax – deceased estate – Commissioner’s discretion to extend the 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 date?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2017.
The scheme commences on:
1 July 2016.
Relevant facts and circumstances
The deceased and their spouse acquired a dwelling in joint names before 1985.
They occupied the dwelling as their main residence.
Their spouse passed away sometime after 1985.
The deceased acquired their spouse’s ownership interest in the dwelling.
The deceased passed away sometime later.
Probate was granted.
Under the terms of the Will, a 12 month option was granted to the deceased’s relative, to purchase the dwelling.
The option expired. The executors granted an extension to the option to the deceased’s relative additional time to explore financing options.
Once the deceased’s relative had advised the executors that they would not be purchasing the dwelling, the executors immediately proceeded to prepare the dwelling for sale.
The dwelling was not used to produce assessable income at any time during this period.
The dwelling comprised a substantial allotment of agricultural land with planning restrictions, and as such an appropriate offer took some time to procure.
A contract for sale was signed and settlement occurred two years and three months after the deceased death.
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 DDMMYY.
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.
In your submission, you state that delay in disposing of the dwelling was due to a 12 month option to purchase the dwelling that was granted to the deceased’s relative, under the terms of the will. The option was then extended further to allow the deceased’s relative additional time to explore other financing options.
Once the deceased’s relative had advised that they would not be going to exercise their option to purchase the dwelling, the executors immediately proceeded with the sale of the dwelling. However, due to the substantial allotment of agricultural land that the dwelling comprised, together with the planning restrictions, the sale of the dwelling took some time, with settlement occurring two years and three months after the deceased death.
We have taken the facts of your situation into consideration when determining whether the Commissioner’s discretion would be exercised to extend the two year period and allow you to disregard any capital gain or loss made on the disposal of the dwelling under subsection 118-195(1) of the ITAA 1997.
We accept the reasons for the delay in the disposal of the deceased’s dwelling was due to the above mentioned issues arising during the two year period after the deceased had passed away. A significant portion of the two years had passed by the time it was known that the option would not be exercised, and the property was immediately prepared for sale.
The Commissioner accepts that it is appropriate to grant the short extension that you have requested.
Note: The main residence exemption can include land adjacent to the dwelling to the extent that it is used primarily for private or domestic purposes in association with the dwelling. The exemption applies to a maximum of two hectares of adjacent land, including the land immediately under the dwelling.
You can choose which two hectares of land, (including the land that your main residence dwelling is built on) that you apply the main residence exemption to. The remaining area of land is subject to capital gains tax.