Edited version of your written advice

Authorisation Number: 1051382782931

Date of advice: 11 July 2018

Ruling

Subject: Deceased estates-CGT and the Commissioner’s discretion to extend the two year time limit to dispose of a dwelling

Question 1

Will the Commissioner exercise his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension of time to the two year period for you to dispose of your part ownership interest in the dwelling?

Answer 1

No

Question 2

Are you able to disregard any capital gain or loss under subsection 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?

Answer 2

No.

Question 3

Will you be entitled to a partial main residence exemption on the disposal of your part ownership interest held in the dwelling?

Answer 3

Yes

This ruling applies for the following period

Year ended 30 June 2017.

The scheme commences on

1 July 2016.

Relevant facts and circumstances

C and D and their child P acquired a dwelling before 20 September 1985 (the dwelling).

C and D took out a mortgage in relation to dwelling at the time of purchase. When the mortgage was discharged P consented to P’s name being removed from the title.

C passed away and D continued to reside in the dwelling and treated it as D’s main residence until D passed away (the first deceased).

The first deceased’s will provided that each of the deceased’s children would be entitled to an equal share of the dwelling as tenants in common.

Title to the dwelling was transferred into the beneficiaries name shortly after the passing of the first deceased.

P resided with C and D in the dwelling and continued to reside in the dwelling following the first deceased’s passing.

P was diagnosed with a serious medical condition and had a major operation and treatment some decades ago. P developed serious health complications over P’s life.

P’s siblings and beneficiaries of the deceased estate E (you), F and G agreed to allow P to continue to reside in the dwelling given the serious medical condition P was impacted by and an assumption that P would have as shorter life expectancy. P did not pay any rent to P’s siblings as part of this informal arrangement. P did not have a right under the will to reside in the first deceased’s dwelling.

P was able to return to work within a short time after receiving medical treatment and worked for several decades until retirement.

Following P’s retirement, P’s health deteriorated and P could no longer travel long distances to attend family functions.

P received assistance and visits from P’s siblings while P lived in the dwelling. You visited P weekly following P’s retirement to assist in household duties and appointments.

P was affected by other medical complications throughout P’s life. You would take P to the local hospital regularly to receive treatment for these health conditions.

P continued to live alone at the dwelling, but a short time before they passed away they agreed to move in with you and sell the dwelling. P only resided with you for a short period of time before being hospitalised and relocating to rehabilitation accommodation before passing away (the second deceased).

The second deceased’s will provided for P’s one quarter interest (1/4) in the dwelling to be distributed equally between you and your other siblings.

Settlement of the sale of the dwelling occurred within a short time following P’s passing.

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 section 118-200

Income Tax Assessment Act 1997 section 118-205

Reasons for decision

Question 1

Summary

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

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 Explanatory Memorandum for the Tax Laws Amendment (2011 Measures No. 9) Act 2012 explains the Commissioner would be expected to exercise 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.

These examples are not exhaustive.

In exercising this discretion, the Commissioner is expected to consider whether and to what extent the dwelling is used to produce assessable income and the period that the trustee or beneficiary held the ownership interest in the dwelling.

The Commissioner’s discretion to extend the two year period 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).

Application to your circumstances

In your case, there was no legal or physical impediments that contributed to the delay in disposing of the first deceased’s dwelling. The delay was attributable to the following:

● While P was affected by serious medical conditions prior to the passing of C and D, you and your siblings as beneficiaries of the first deceased estate had through an informal arrangement allowed P to reside in the dwelling assuming P would have a shortened life expectancy. P had no right to reside in the dwelling under the provisions of the first deceased’s will.

● When the first deceased’s dwelling was transferred into the names of the beneficiaries, the beneficiaries were advised of possible future capital gain tax implications. You have assumed based on previous written advice that you would not incur any capital gain tax liability due to the fact that one of the beneficiaries was residing in the dwelling. You have not undertaken any recent enquiries to ascertain any possible capital gain tax implications in allowing P to reside in the dwelling.

● While we appreciate P was seriously ill and P’s illness lead to other health conditions throughout P’s life, P was able to resume employment until P’s retirement. In fact, most of the serious complications following diagnosis and treatment occurred within the last decade of P’s life.

● The period of time from the date of the deceased’s passing until the dwelling was sold was substantially greater than 2 years. This is considered to be a significant period of time to dispose of an inherited dwelling.

Consequently, the Commissioner considers that there were no legal or physical impediments that prevented the disposal of the dwelling within the 2 year period from the date the first deceased passed away and cannot apply the discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit.

Question 2

Summary

As a beneficiary, you did not reside in the dwelling as your main residence following the first deceased’s passing until the dwelling was sold. Therefore, you cannot disregard any capital gain or loss under section 118-195 of the ITAA 1997 when your ownership interest in the dwelling is sold.

Detailed reasoning

Section 118-195 of the ITAA 1997 provides a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if:

(a) you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

(b) at least one of the items in column 2 and at least one of the items in column 3 of the following table are satisfied.

Application to your circumstances

As a beneficiary, you inherited an interest in the dwelling at the date the first deceased passed away and subsequently a X% interest in the second deceased’s ownership interest at the date P passed away. As a beneficiary, you did not reside in the dwelling as your main residence. From the date of the first deceased’s passing up until your retirement, you resided in rental accommodation. You do not satisfy the condition in subsection 118-195(1), table item 2(c), in that the dwelling was not your main residence as a beneficiary to whom the ownership interest passed from the date of the deceased’s passing until the dwelling is sold.

Question 3

Summary

Your ownership interest in the first deceased’s pre CGT interests are not exempt from CGT. Your ownership interest in first deceased post CGT interests are subject to a partial CGT exemption. Your ownership interest in the dwelling acquired from the second deceased is exempt from CGT as it was the second deceased’s main residence at the date the first deceased passed away and was disposed of within two years of the second deceased’s passing.

Detailed reasoning

CGT and deceased’s estates

Assets forming part of the deceased’s estate are deemed to have been acquired by the legal person representative (LRP) or beneficiary at the date the deceased passed away.

Section 128-20 of the ITAA 1997 states that when a taxpayer passes away, there are no CGT implications when an asset passes to the LPR or beneficiary, but CGT may apply when the asset is subsequently disposed of.

Partial main residence exemption

Although you are not eligible for a full main residence exemption for your ownership interest in the dwelling of the first deceased, section 118-200 of the ITAA allows for a partial exemption (or no exemption) if:

a. you are an individual and your ownership interest in a dwelling passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

b. section 118-195 of the ITAA 1997 does not apply.

You calculate your capital gain or capital loss using the formula:

Capital gain or capital loss amount x Non-main residence days ÷ Total Days

The Capital gain or capital loss is the amount that you made from the disposal of the dwelling (before applying any main residence exemption).

The Non-main residence days is the sum of:

a. if the deceased acquired the ownership interest on or after 20 September 1985 – the number of days in the deceased’s ownership period when the dwelling was not the deceased’s main residence; and

b. the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of one of the following:

● a person who was the spouse of the deceased (except a spouse who was permanently separated from the deceased)

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

● you, as a beneficiary, if you disposed of the dwelling as a beneficiary.

Total days is:

a. if the deceased acquired the ownership interest before 20 September 1985, the number of days from the deceased’s death until you disposed of your ownership interest; or

b. if the deceased acquired the ownership interest on or 20 September 1985 – the number of days in the period from the acquisition of the dwelling by the deceased until you disposed of your ownership interest.

Adjustment if the dwelling is inherited from a deceased individual

Section 118-205 of the ITAA 1997 provides you must adjust the formula in subsection 118-200(2) if the ownership interest of the deceased individual referred to in section 118-200 (the most recently deceased) passed to the individual on or after 20 September 1985 as a beneficiary in a deceased estate (in the following manner):

Add to the component total days in the formula the fewer of:

(a) the number of days between 20 September 1985 and the day when the interest passed to or was acquired as trustee by the most recently deceased; and

(b) the number of days between the time when an ownership interest in the dwelling was last acquired on or after 20 September 1985 by an individual except as a beneficiary in a deceased estate or as trustee of a deceased estate and the day when the interest passed to or was acquired as trustee by the most recently deceased.

Add to the component non-main residence days in the formula the number of days in the period applicable under subsection (2) that the dwelling was not the main residence of one or more of:

(a) an individual who owned the dwelling at the time of the individual's death; or

(b) an individual who, immediately before the death of an individual referred to in paragraph (a), was the spouse of that individual (except a spouse who was living permanently separately and apart from the individual); or

(c) an individual who had a right to occupy the dwelling under a will; or

(d) an individual to whom an ownership interest in the dwelling passed as a beneficiary in, or who acquired an ownership interest in the dwelling as trustee of, a deceased estate.

Application to your circumstances

You acquired your ownership interest in the first deceased’s dwelling at the date the first deceased passed away. Your ownership interest consisted of the following separate CGT assets:

1. The first deceased’s pre CGT interests, consisting of a 1/X and a 1/Y ownership interest acquired before 20 September 1985.

2. The first deceased’s post CGT interests consisting of a 1/X and 1/Y interest held by the first deceased’s spouse that passed to the first deceased when C passed away.

3. You subsequently acquired a 1/Z interest in the second deceased’s ownership interest in the dwelling at the date the seconded deceased passed away.

For CGT purposes these three interests in the dwelling are treated separately.

1. Your interest in the first deceased’s 1/X and 1/Y Pre CGT ownership interest

As you did not dispose of these Pre CGT interests within 2 years of the deceased’s passing, you do not satisfy the conditions in section 118-195 of the ITAA 1997. Although P inherited an interest in the dwelling as a beneficiary of the first deceased’s estate and continued to live in the dwelling until P passed away, because there was no explicit right for P to occupy the dwelling under the deceased’s will and the dwelling was not your main residence, the full main residence is not available to you in respect to your interest.

Applying the partial or no exemption formula in section 118-200 to your situation, where the first deceased acquired an ownership interest before 20 September 1985, the non-main days and total days are calculated as follows:

Non main residence days is the number of days in the period from death until your ownership interest ends when the dwelling was not the main residence of you, either as a beneficiary, a person with a right to occupy or the deceased’s spouse. As the first deceased continued to reside in the dwelling following the passing of C until D passed away, the non-main residence days include the period when the first deceased passed away to settlement of the sale of the dwelling).

In the case of a assets acquired by the deceased prior to 20 September 1985, the total days is the period from the passing of the deceased until your ownership period ends (sale of the settlement of the dwelling).

As the non-main residence days equal the total days in the formula in section 118-200 you are not entitled to any CGT exemption.

You can however use the discount method to calculate your capital gain for this interest as you meet the relevant criteria.

2. Your interest in the first deceased’s 1/X and 1/Y post CGT ownership interest

For the purposes of working out whether a partial or no CGT exemption applies to your post CGT interest, your main residence days and total days in formula 118-200 is as follows:

The non-main residence days where the deceased acquired their ownership interest after 20 September 1985 is the number days in the deceased’s ownership period when the dwelling was not the deceased’s main residence and the number of days in period from the first deceased’s passing until the deceased’s ownership interest ends.

The total days for CGT assets acquired by the deceased after 20 September 1985 is the number of days in the period from the acquisition of the dwelling (acquired at the date D’s spouse passed away until your ownership interest ends.

As this post CGT asset in the dwelling was acquired by D after 20 September 1985 as a beneficiary of C’s estate , the total days and non-main residence days need to be adjusted under section 118-205 of the ITAA 1997.

The total days is adjusted in accordance with section 118-205 of the ITAA 1997 by adding the fewer of:

● The number of days between 20 September 1985 and the day the ownership interest passed to the most recently deceased (date C passed away); and

● The number of days between the time when an ownership interest in the dwelling was last acquired on or after 20 September 1985 by an individual except as a beneficiary in a deceased estate or as trustee of the deceased estate and the day when the interest passed to or was acquired as trustee by the most recently deceased (0 days).

In your case, the number of total days calculated under the latter option is nil. Although nil is less than the number which would be calculated under the former option, it is considered that the comparison required by the legislation is between two positive numbers of days, otherwise the provisions do not operate as intended. Accordingly, the number of days between 20 September 1985 and the date of C’s passing should be added to the total days.

Non-main residence days is adjusted by adding to it the number of days that the dwelling was not the main residence of one or more:

● An individual who owned the dwelling at the time of the individual’s death; or

● Their spouse (except a spouse who was living permanently separately and apart from the individual); or

● An individual who had a right to occupy the dwelling under a will; or

● An individual to whom the ownership in the dwelling passed as a beneficiary in a deceased estate.

As the dwelling was either the main residence of C or D from the time they acquired their interest in the dwelling until the first deceased passed away, there are no non main residence days required to be added to the formula.

You can then apply the discount method to calculate your capital gain for this interest as you meet the relevant criteria.

3. Your interest in the second deceased's ownership interest that passed to you at the date the second deceased passed away

The second deceased acquired an interest in the dwelling on the date the first deceased passed away. The second deceased’s ownership interest consisted of the following:

● The First deceased’s pre CGT interests consisting of the 1/X and 1/Y interest

● The first deceased’s post CGT interests consisting of a 1/X and 1/Y interest that passed to D on the passing of D’s spouse.

As the dwelling was the main residence of the second deceased when P passed away and was transferred to the trustee of P’s estate or beneficiaries within 2 years of P’s passing, any capital gain tax can be disregarded under the provisions of section 118-195 of the ITAA 1997.