Edited version of your written advice

Authorisation Number: 1051398911768

Date of advice: 13 July 2018

Ruling

Subject: The Commissioner’s discretion to extend the two year time limit to dispose of a dwelling

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?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2018.

The scheme commences on

1 July 2017.

Relevant facts and circumstances

L and M jointly purchased a dwelling before 20 September 1985.

The dwelling was used as their main residence.

Following L’s passing, L’s joint interest was transferred to L’s spouse.

M continued to reside in the dwelling up until M passed away (the deceased).

The deceased’s will provided that the residue of M’s estate (estate) was to be left to M’s children and grandchildren.

One of the grandchildren, N resided in the deceased’s dwelling within a short period of time following M’s passing until the dwelling was sold.

The deceased’s will appointed P as executrix (executrix).

As the executrix did not administer the deceased’s estate, the executrix sibling Q made many attempts to have the estate administered and the dwelling sold. During the discussions between the executrix and Q, the executrix indicated a desire to acquire Q’s interest and any interests that the grandchildren were entitled to under the estate.

As the deceased’s estate remained administered, Q made contact with free legal services to understand Q’s legal rights and expected legal costs in pursuing legal action. Based on the advice Q received regarding the possible legal costs and the advice from the executrix regarding the value of the dwelling, Q did not pursue any legal action.

Q engaged a legal practitioner and over a period of 12 months, the legal practitioner made repeated attempts to discuss the distribution of the estate with the executrix and put the executrix on notice of impending legal proceedings.

Legal documents were prepared many years after the deceased had passed away and filed with the court and served on the executrix. The purpose of the legal documents was to have the executrix removed and Q appointed to enable the estate to be administered and the deceased’s dwelling sold.

The matter was adjourned by the court before court orders were issued requiring the executrix to deliver the original will of the deceased for the purposes of obtaining probate.

An application was made by Q for letters of administration and letters of administration were granted by the court within a short time of the application being made.

Q’s solicitor arranged for the certificate of title to the dwelling to be collected from the executrix to expedite the sale of the dwelling.

The dwelling was scheduled for auction and within a short period following the auction, contacts were exchanged and settlement of the sale of the dwelling occurred.

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

Summary

The Commissioner will not exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time

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.

You have not raised any legal or physical impairments that mitigated against the administration of the estate. The time delay in the administration of the estate was due to:

● The executrix continued to defer the sale of the dwelling and allowed the grandchild of the deceased to live in the dwelling.

● The beneficiaries of the estate had knowledge that the grandchild of the deceased lived in the dwelling and made no arrangements to obtain probate until several years following the deceased passing.

● While the executrix made representations to the other beneficiaries about purchasing their interests in the estate, the executrix did not follow through on these representations.

● While legal advice was obtained by Q some years following the deceased’s passing, legal action was initiated by the beneficiary Q against the executrix of the estate a substantial period of time following the deceased’s passing.

● While we acknowledge that Q as beneficiary of the estate tried unsuccessfully to negotiate the sale of the dwelling with the executrix for some years, it took a substantial period of time from the date that the deceased passed away before settlement of the sale of the dwelling occurred.

Conclusion

Having considered the relevant facts, the Commissioner will not apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit.

However, the trustee of the estate would be entitled to a partial main residence exemption under section 118-200 and any adjustments made under section 118-205 of the ITAA 1997 in relation to the post CGT interest held by the estate. This is because the estate consists of two CGT assets:

1. The 1/X pre CGT interest in the dwelling acquired by the deceased.

2. The 1/X post CGT interest acquired by the deceased from the deceased’s spouse.

The partial main residence exemption which would apply to the 1/X post CGT interest allows the total days in the formula within section 118-200 to include the total days in which the deceased’s spouse occupied the dwelling and treated it as the spouse’s main residence, with necessary adjustments under section 118-205 of the ITAA 1997.

Because the beneficiaries have held both pre and post CGT assets for more than 12 months, they are able to apply the 50% discount to any capital gain.