Edited version of private advice

Authorisation Number: 1051599652482

Date of advice: 8 November 2019

Ruling

Subject: Capital gains tax - deceased estate

Question

Will the Commissioner allow an extension of time for you to dispose of your ownership interest in the dwelling and disregard the capital gain you make on the disposal?

Answer

No

This ruling applies for the following period:

Period ending 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

Your parents purchased a dwelling at xxxx in xxxx.

In approximately xxxx, your parents purchased a dwelling next door. At this time they removed some walls to create one house.

Your parents lived at this house until their deaths in xxxx and xxxx respectively.

You are one of xxxx children.

At the time of your second parents death, the dwelling next door was owned by your sibling.

Xxxx was owned by your parents and at the time of your second parent's death was left to you and your remaining xxxx siblings (excluding xxxx).

Following your second parent's death it was decided that xxxx would be divided back into 2 single houses.

The process of dividing the houses commenced in xxxx, approximately xxxx year after the date of your second parent's death.

Building works to separate xxxx and xxxx commenced in xxxx and were completed in xxxx.

Xxxx was put up for sale in xxxx.

At the time xxxx was put up for sale, xxxx offered to buy it with the intention of refurbishing it and joining it to their dwelling.

Some problems were encountered and work was required to be carried out prior to the granting of a mortgage.

As the purchaser of xxxx was known to you and the property market was weak, you allowed the purchaser to carry out building works before completion of the sale to them.

The sale of xxxx to the neighbour was completed in xxxx.

The amount of your gain was xxxx, a xxxx share of the xxxx gain made upon the sale.

Reasons for Decision

Subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides a capital gains tax (CGT) exemption to a beneficiary or trustee of a deceased estate where a CGT event happened to a dwelling, or an ownership interest in a dwelling, acquired from a deceased estate.

This means that if you dispose of an ownership interest in a dwelling that passed to you as an individual beneficiary or as the trustee of the deceased's estate within two years of the deceased's death, any capital gain or loss you make on the disposal is disregarded. The Commissioner has the discretion to extend this two year period. An exemption is provided in accordance with subsection 118-195(1) of the ITAA 1997 where the following conditions are satisfied:

• The beneficiary's or trustee's ownership interest in the dwelling ends within two years of the deceased's death; and
• For post-CGT dwellings, just before the deceased's death:

o   The dwelling was their main residence; and

o   It was not then being used to produce assessable income.

Generally, the Commissioner will allow a longer period where the dwelling could not be sold and settled within two years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first two years.

When considering whether to extend the two year period, we will consider all the factors for and against extension based on the facts of your situation. The Commissioner would be expected to exercise discretion where:

·         the ownership of the dwelling or the will is challenged

·         a life or other equitable interest given in the will delays the disposal of the dwelling

·         the complexity of the deceased estate delays the completion of administration of the estate or settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of your control.

·         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.

The above 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 whether and to what extent the dwelling is used to produce assessable income and for how long the trustee or beneficiary held the ownership interest in the dwelling.

Whether the Commissioner will exercise his discretion under subsections 118-195(1) and 118-200(3) of the ITAA 1997 will depend on the facts of each case. As stated above, the relevance and weight to be given to each of the factors described above will depend on the facts and circumstances of each case.

Examples of reasons considered not to be acceptable for exercising the Commissioner's discretion include:

·         waiting for the property market to pick up before selling the house,

·         delay due to refurbishment of the house to improve the sale price,

·         inconvenience on the part of the trustee or beneficiary to organise the sale of the house

In your application, you stated that you delayed the sale of the property as the property market in xxxx was weak at the time. This was one of two factors that combined to cause a delay of approximately 14 months. Additionally, you allowed building works to be carried out prior to placing the property on the market. This delay was to assist your neighbour to obtain a mortgage to purchase xxxx as they planned to refurbish and join the property to their property.

You also stated that you delayed the sale of xxxx as you did not want to make your sibling move out of xxxx during the winter. Additionally, you stated that you did not want to rush your sibling into dealing with the sale of your family home after your mother's death. Although we appreciate that you wanted a higher price for the sale of the property and did not want to inconvenience your sibling after the death of your mother, unfortunately, none of these factors weigh in favour of the Commissioner granting an extension of time.

It is considered that the delays experienced were not outside your control and were the result of family arrangements made. There was nothing that legally prevented you from disposing of the dwelling.

As the Commissioner has not exercised his discretion to extend the two year period to dispose of the property under section 118-195 of the ITAA 1997, the capital gain made on the property from the date the deceased passed away until the property is disposed of will be taxable.

As section 118-195 of the ITAA 1997 does not apply to your situation, you may be entitled to a partial exemption of the capital gain or capital loss made on the disposal of the property under section 118-200 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 118-195

Income Tax Assessment Act 1997 subsection 118-195 (1)

Income Tax Assessment Act 1997 section 118-200

Income Tax Assessment Act 1997 section 118-200 (3)