Edited version of your written advice

Authorisation Number: 1051515110574

Date of advice: 23 May 2019

Ruling

Subject

Capital gains tax – deceased estate – Commissioner’s discretion

Question

Will the Commissioner allow an extension of time beyond the usual two-year period for you to dispose of your ownership interest in the dwelling and land in order to disregard the capital gain you make on the disposal?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased acquired dwelling and several land lots (Properties A, B, C, D and E)

The deceased passed away in 20XX.

The dwelling was the deceased’s main residence (Property A).

The five properties listed have five separate titles all applied for two-year discretion all were disposed of (i.e. sold) in five separate Capital Gains Tax events (on five separate dates).

Four properties are vacant blocks. Properties B, C, D and E

The deceased had a child listed as executor and sole beneficiary in their Will.

Probate was applied for and granted by Supreme Court of State X, in the year after the deceased’s death.

The Will was contested by three siblings of the deceased, resulting in a ruling by the Supreme Court in their favour granted three years after the deceased’s death.

The dwelling and land lots were placed on the market for sale.

Property A with the dwelling was sold approximately two years after the date of the court orders, and five years after the deceased’s date of death.

Final settlement of the remaining Properties B, C, D and E of vacant land occurred approximately five years after the Supreme Court judgment and approximately seven years after the deceased’s 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 section 118-115

Income Tax Assessment Act 1997 section 118-120

Application to your situation

Do the properties fall under the definition of ‘dwelling’?

Before considering whether the Commissioner’s discretion for the dwelling of a deceased estate, applies, we must determine whether the properties can be defined as ‘dwellings’.

Property A

Property A includes a dwelling that was used wholly for residential accommodation. Therefore, it meets the definition of ‘dwelling’ under s118-115. However, this property comprises approximately 8 hectares. Section 118-120(3) ITAA 1997 provides that a dwelling’s ‘adjacent land’ can be included as part of the ‘dwelling’ if it was subject to the same CGT event but is limited to a maximum of 2 hectares of land.

Accordingly, the residential building and two hectares of land only on Property ‘A’ falls under the definition of ‘dwelling’. Therefore, the dwelling and the adjacent two hectares of land can be considered for the CGT exemption for dwellings acquired from a deceased estate.

However, the remaining approximately six hectares of land on Property A cannot be considered for this CGT exemption, as it does not fall under the definition of ‘dwelling’.

Properties B, C, D and E

Although Properties B, C, D and E are adjacent to Property A, ‘adjacent land’ does not usually come under the definition of ‘dwelling’, unless all of the following conditions apply:

● the land was subject to the same CGT event as the dwelling;

● the land was used primarily for private or domestic purposes; and

● the maximum area of land is two hectares.

On the facts, at least one of these conditions do not apply. That is, properties B, C, D and E were sold on different dates to Property A, so were not subject to the same CGT event as the dwelling.

Therefore, Properties B, C, D and E do not fall under the definition of ‘dwelling’ as set out in the legislation.

As a result, these properties cannot be considered for the CGT exemption for ‘dwellings acquired from a deceased estate’, so are subject to the CGT rules as contained in the provisions of the ITAA 1997.

Property A: Commissioner’s discretion to extend the 2-year period

We here consider whether the Commissioner’s discretion to extend the 2-year period will apply to Property A.

Generally, the Commissioner will exercise the discretion in situations where the delay is due to circumstances outside of the control of the beneficiary or trustee.

Applied to your circumstances, the deceased passed away on 20XX, and probate was granted approximately six months later. However, the Will was contested and this litigation was finalised two and a half years after the deceased’s death.

It was not possible to dispose of Property A before the date on which the litigation was finalised.

By this time, the two-year time period for disposal of Property A had already passed. This was beyond your control, and therefore it is possible to apply the Commissioner’s discretion to extend the two-year time period on this account.

Had Property A been sold in a reasonable time from the date of litigation finalised, it is likely that the Commissioner’s discretion would have applied to the dwelling on Property A along with two of the (approximately) eight hectares of adjacent land.

However, disposal of Property A was not settled until approximately two years after the date the litigation was finalised and court orders made, and five years after the deceased’s date of death.

It was within the control of the executor to sell Property A within a reasonable time after the date court orders were made. The delay in the sale of the property was therefore not a matter outside your control. You have not provided any other reason for the delay in disposal of Property A.

Having considered the relevant facts and circumstances, the Commissioner’s discretion under subsection 118-195(1) of the ITAA 1997 to extend the two-year period will not be applied in this matter as the delay in sale of Property A was not outside of your control. Property A is therefore subject to the rules contained in the CGT provisions of the Income Tax Assessment Act 1997.