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Edited version of your written advice
Authorisation Number: 1051358272426
Date of advice: 6 April 2018
Ruling
Subject: Main residence exemption for deceased estate
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 to dispose of the dwelling?
Answer
No
This ruling applies for the following period
1 July 2018 to 30 June 2019
The scheme commences on:
1 July 2016
Relevant facts and circumstances
● the deceased passed away
● the deceased owned a property that was purchased after 20 September 1985 and was their main residence
● the deceased was in an aged care facility when they passed away
● a child of the deceased is the sole executor and beneficiary of the estate
● the dwelling was used to produce assessable income since their death to cover the costs of the estate this including legal costs for the Supreme Court challenges to the Will
● the Will was contested by another child of the deceased and an agreement was reached late in the year following the year that the deceased passed away
● the property has not yet been placed on the market to be sold.
An extension of time is being requested to allow for:
a. 12 weeks for the tenants to vacate the property
b. it is claimed that the property was rented to meet the costs of the estate
c. eight weeks to prepare property for sale – repairs, appoint agent, prepare for campaign, photo shoot, with the campaign to begin
d. six week campaign to sell, anticipating an auction
e. eight week settlement date
f. unanticipated delays in tenants vacating, delays in settlement, or other unanticipated problems.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subdivision 115-A
Income Tax Assessment Act 1997 section 102-20
Income Tax Assessment Act 1997 section 118-195
Income Tax Assessment Act 1997 section 104-10
Reasons for decision
Summary
The Commissioner will not exercise his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension of time?
Detailed reasoning
The Commissioner has the power to extend the two year period to dispose of an inherited dwelling in relation to CGT events that happened in the 2008-09 income year and later income years in accordance with the explanatory memorandum (EM) to the Bill that added the discretion in section 118-195 of the ITAA 1997, (Tax Laws Amendment (2011 Measures No 9) Bill 2011). This enables a trustee or beneficiary of a deceased estate to apply to the Commissioner to grant an extension of the two year time period to dispose of the deceased’s dwelling, where the CGT event happens in the 2008-09 income year or later income years.
Generally, the Commissioner would only 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); or
● the 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 dwelling.
In exercising the discretion the Commissioner will also take into account how long the trustee or beneficiary held the ownership interest in the dwelling and the extent to which the dwelling has been used for other purposes, such as:
● producing assessable income
● a main residence for a beneficiary or associates of the beneficiaries
● renovations or other activities designed to increase the sale price, or
● waiting for the property market to improve.
Whether the Commissioner will exercise his discretion under subsection 118-195(1) of the ITAA 1997 will depend on the facts of each case.
Application to your situation
In your case the Commissioner has decided not to exercise his power to extend the main residence exemption. We have taken the following into consideration when making our decision:
● the deceased passed away and the child was appointed executor of the estate
● the Will was contested by another child of the deceased and an agreement was reached late in the year following the deceased passed away.
● there has been no attempt to put the property on the market
● the dwelling was rented out to cover costs of the estate particularly legal costs on the Supreme Court challenge
● it is intended to give the current tenants 12 weeks’ notice to vacate the property after the private ruling has been issued
● it is planned that about eight weeks would be required to prepare the property for sale including repairs to bring it to a saleable condition
● It is anticipated that a six week campaign would be needed to sell the property at auction and settlement would take another eight weeks
● the Executor should have been aware that the capital gains tax provisions might apply if the sale of the property was delayed beyond two years from the date the deceased passed away
● the information and documentation provided does not support that the deceased’s estate was of a complex nature. This is not a factor that the Commissioner would take into consideration when making the decision on whether or not to exercise his discretion to extend the two year period to dispose of the property.
Conclusion
The Commissioner’s discretion is limited to situations where the owner is effectively prevented from selling the property. The intention of the two year period is to allow the orderly and timely sale of the deceased’s property.
In your case, the legal proceedings were finalised on late in the year following the year that the deceased passed away and the property could have been placed on the market soon after (even whilst tenanted).
As the Commissioner has not exercised his discretion to extend the two year period up until the date you requested, any capital gain or capital loss made on the disposal of the deceased’s inherited property cannot be disregarded.