Edited version of private advice

Authorisation Number: 1051587977538

Date of advice: 8 October 2019

Ruling

Subject: Commissioner's discretion for an extension of time and Capital Gains Tax

Question 1

Will the Commissioner exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time until XX January 20XX?

Answer

No.

Question 2

Are you entitled to a partial exemption for capital gains tax arising from the sale of the inherited property?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

Your parent died on X October 20XX.

You were nominated as executor of their will and sole beneficiary of the estate.

You inherited your parent's dwelling (the dwelling).

Probate was granted in December 20XX and the title of the dwelling was transferred to you on X April 20XX.

The dwelling was your parent's main residence just before they died and it was not being used for the purpose of producing assessable income.

Your parent purchased the dwelling with your other parent before 20 September 1985 as joint tenants.

Your parent inherited your other parent's interest of the dwelling when they died on X August 20XX.

You were a resident of another country at the time of your parent's death.

The dwelling was full of possessions, and falling into disrepair at the time of your parent's death.

Because of the impracticality of selling the dwelling, you agreed to allow your late parent's fiancé to live in the dwelling as a caretaker for a nominal rental fee of $X per week.

The rental agreement started on XX November 20XX and continued until July 20XX.

Your parent's fiancé lived with them immediately before their death.

You and your spouse decided to move back to Australia to be closer to your grandparent and to facilitate the sale of the dwelling. You could not find employment in X and so you took the first available job which was based in X and moved to Australia in July 20XX.

Whilst you made several trips to X in an attempt to clean out the dwelling and begin repairs, you were only able to make minimal progress on preparations for sale. You were limited to the number of trips you were able to take due to your lack of annual leave.

You found suitable employment in X which enabled you to relocate to X on XX November 20XX.

You immediately made the dwelling your principle place of residence from this date.

Over the next 12 months you restored the dwelling in preparation for sale.

You vacated the dwelling in October 20XX to facilitate its sale, at which time the dwelling ceased to be your principal place of residence.

The dwelling was then sold with the contract signed on XX December 20XX and settlement on XX January 20XX, this being three years and three months after your parent passed away.

Relevant legislative provisions

Income Tax assessment Act 1997 Section 115-105,

Income Tax assessment Act 1997 Section 115-115,

Income Tax assessment Act 1997 Subsection 115-115(4),

Income Tax assessment Act 1997 Subsection 115-115(5),

Income Tax assessment Act 1997 Section 118-130,

Income Tax assessment Act 1997 Section 118-190,

Income Tax assessment Act 1997 Section 118-195,

Income Tax assessment Act 1997 Section 118-200,

Income Tax assessment Act 1997 Section 118-205, and

Income Tax assessment Act 1997 Section 128-15.

Reasons for decision

Question 1

The capital gains tax 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 under subsection 118-195(1) of the ITAA 1997 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 following is a non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion:

·        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 reasons outside the beneficiary or trustee's control

In your case, the factors causing the delay of the sale are not considered to be outside of your control to allow the Commissioner's discretion to be exercised. The delay to the sale of the dwelling included the decision to allow your parent's spouse to occupy the dwelling, location and the repairs undertaken to prepare the dwelling for sale.

The repairs and the time taken to repair the dwelling to a standard of sale may be considered to be a delay outside of your control if the dwelling was in a state where it could not be sold due to significant repairs needed, or it was unliveable. However both you and your family and your parent's fiancé resided in the dwelling prior to the repairs being undertaken, which identifies that the dwelling was not unliveable and could be sold as is. Additionally, the repairs to the dwelling did not commence until you moved into the dwelling, being two years and one month after your parent passed away.

As a result, the Commissioner cannot exercise the discretion under subsection 118-195(1) of the ITAA 1997 and allow and extension of time.

Question 2

Detailed Reasoning

Where a trustee or beneficiary of a deceased estate cannot access a CGT exemption under section 118-195 of the ITAA 1997, section 118-200 of the ITAA 1997 may provide a partial exemption.

You may be fully or partly exempt from CGT depending on:

·        when the deceased acquired the property

·        when they died

·        whether the property has been used to produce income (such as rent)

·        whether the deceased was an Australian resident at the time of death

If you're not exempt, or only partly exempt, you need to know the cost base of the dwelling to work out your capital gain. The cost base may be the value of the dwelling when the deceased acquired it or the value when they died, depending on the circumstances above.

In your circumstances, the first element of the cost base or reduced cost base of the dwelling will be the market value of the dwelling at the date of your parent's death.

You can also include in your cost base or reduced cost base any expenditure that the legal personal representative incurred prior to probate being granted. Further information for calculating your cost base is provided on the ATO website should you require it.

Calculation of the partial exemption

Under section 118-200 of the ITAA 1997 you calculate your capital gain or capital loss by using the formula:

Capital gain or loss amount x non-main residence days ÷ total days

Separate calculations are required for the interest in the property acquired by you parent as a result of your other parent's death, and the interest that she initially purchased pre-CGT.

Pre-CGT interest

·        Non-main residence days, is the number of days in the period from your parent's date of death until your ownership interest ends (settlement date), when the dwelling was not the main residence of your parent's spouse or yourself.

·        Total days, is the number of days in the period from your parent's date of death until your ownership interest ends.

Post CGT interest (inherited from your other parent)

·        Non-main residence days, is the number of days in your parent's ownership period when the dwelling was not their main residence, and the number of days in the period from your parent's date of death until your ownership interest ends, when the dwelling was not the main residence of your parent's spouse or yourself,

You ignore the non-main residence days before your parent's death due to the fact that the dwelling was your parent's main residence just before their death and it was not being used to produce assessable income.

·        Total days, is the number of days in the period from when your parent acquired their interest from your other parent until your ownership interest ends.

Use of the dwelling for income producing purposes

Section 118-190 of the ITAA 1997 provides the rules regarding the granting of a partial exemption where a dwelling is used for producing assessable income.

You get only a partial exemption for a CGT event that happens in relation to a dwelling or your ownership interest in it if:

(a) apart from this section, because the dwelling was your main residence or someone else's during a period:

(i) you would not make a capital gain or capital loss from the event; or

(ii) you would make a lesser capital gain or loss than if this Subdivision had not applied; and

(b) the dwelling was used for the purpose of producing assessable income during all or a part of that period; and

(c) if you had incurred interest on money borrowed to acquire the dwelling, or your ownership interest in it, you could have deducted some or all of that interest.

The capital gain or capital loss that you would have made apart from this section from the CGT event is increased by an amount that is reasonable having regard to the extent to which you would have been able to deduct that interest.

The non-main resident days in the calculation will need to be adjusted for the proportion of the dwelling that was used for income producing purposes. This applies to both the interest your parent originally purchased and the interest she inherited from your other parent.

Adjustment to the non-main residence day's calculations will be in accordance with the 'interest deductibility test'. This is applied on the assumption that you borrowed money for the entire dwelling regardless of whether this is actually the case. Consider for example that you rented out only part of the dwelling. In this case you would have been entitled to an interest expense deduction for the proportion of the property that was rented. This same proportion of the dwelling is therefor subject to capital gains tax.

Example calculation for an interest in a dwelling acquired before 20 September 1985

The calculation is based on the following information and is an example only:

·        The taxpayer inherited a dwelling on 1 August 2014, being the date of his parent's death. At the time of her death, the dwelling was valued at $615,000 providing the first element of the cost base for the taxpayer.

·        The taxpayer settled the sale of the dwelling 1250 days later on the 2 January 2018 for a sale price of $650,000.

·        Additional elements of the cost base for the purpose of the taxpayer's capital gain calculation amounted to $20,000. This included:

˗        $8,000 for marketing and transfer costs,

˗        $4,000 for rates, insurance, and repairs incurred by the taxpayer that were not previously deducted against the taxpayer's income, and

˗        $8,000 for capital improvements to the property during the taxpayers' ownership period.

·        The taxpayer's parent lived at the property prior to her death and the dwelling was not used by her for the purpose of producing assessable income.

·        The taxpayer's parent had purchased the property with the taxpayer's other parent prior to 20 September 1985 as joint tenants.

·        The other parent's 50% interest was automatically passed to the parent following the other parent's death on 15 July 2002. A period of 6,143 days passed from 20 September 1985 and the date of the taxpayer's other parents passing.

·        The taxpayer's parent's spouse who had lived with her at the dwelling immediately before her death, entered a caretaker rental arrangement during the taxpayer's ownership period, where he utilised one third of the dwelling for a total period of 600 days.

˗        A total of 200 days (600 days x 1/3) will be reduced from the non-main residence spouse exempt days, leaving 400 days for his occupation.

·        The taxpayer also occupied the dwelling during his ownership interest period for 300 days.

·        The total main residence days will be 700 days (400 + 300 from above). This amount can be subtracted from the total days to provide the non-main resident days for both calculations.

Further information to consider- Discount capital gains

Section 115-105 of the ITAA 1997 provides that if you:

·        are an individual; and

·        acquired a CGT asset; and

·        make a discount capital gain from its disposal after 8 May 2012; and

·        were a foreign resident during some of that period;

then your discount percentage is calculated under section 115-115 of the ITAA 1997.

Section 115-115 of the ITAA 1997 provides for the calculation of the discount percentage for individuals who are or were foreign residents during their ownership period.

Subsection 115-115(4) of the ITAA 1997 provides that you work out your discount percentage in one of the below manners below, if:

(a) the discount testing period starts on or before 8 May 2012; and

(b) you were a foreign resident on 8 May 2012; and

(c) the most recent acquisition of the asset happened on or before 8 May 2012; and

(d) the CGT asset's market value on 8 May 2012 exceeds the amount that its cost base was on that day (the excess); and

(e) you choose for this subsection to apply.

If the excess is equal to or greater than the discount capital gain of the CGT asset, then the discount is 50%.

If the excess is less than the discount capital gain, then the discount percentage is calculated using the formula found in subsection 115-115(5). Formula has been supplied.

If the "excess" is less than the discount capital gain (i.e. there has been a steady rise in the MV of the asset to the disposal date), the discount percentage is the percentage using the above formula (subsection 115-115(5) of the ITAA 1997) - the step by step calculation set out below is derived from this formula:

Step 1: calculate the excess (unrealised capital gain as at 08/05/2012);

Step 2: calculate the shortfall (discount capital gain less excess);

Step 3: determine the number of apportionable days the individual was a resident;

Step 4: determine the number of apportionable days;

Step 5: (step 2 amount X Step 3 amount) / Step 4 amount;

Step 6: excess plus Step 5 amount;

Step 7: Step 6 amount / (2 X discount capital gain).