Edited version of private advice

Authorisation Number: 1051600952659

Date of advice: 14 November 2019

Ruling

Subject: Capital gains tax and 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

Year ended 30 June 2019.

Year ended 30 June 2020.

The scheme commences on

1 July 19XX.

Relevant facts

The deceased acquired a dwelling (the dwelling).

The deceased passed away in 19XX.

The dwelling had been the deceased's main residence prior to passing away.

Under the will of the deceased, the deceased's spouse ('A') was granted a life tenancy to occupy the deceased's dwelling.

The will of the deceased also provided that the dwelling was to be divided in equal share to the children of the deceased.

'A' continued to reside in the dwelling until 20XX, when they could no longer manage to live independently.

'A' moved into their child's dwelling.

The dwelling has been used to produce income around this time.

'A' passed away in 20XX.

The dwelling was prepared for sale and a contract for sale was entered into in 20XX.

Settlement occurred in 20XX.

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 subsection 118-195(1)

Reasons for Decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

A capital gain or capital loss may be disregarded under section 118-195 of the ITAA 1997 where a capital gains tax event happens to a dwelling if it passed to you as an individual and a beneficiary of a deceased estate or you owned it as the trustee of the deceased estate.

For a dwelling acquired by the deceased prior to 20 September 1985, you will be entitled to a full exemption if:

• the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of the following individuals:

-      the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased)

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

-      an individual beneficiary to whom the ownership interest passed and the CGT event was brought about by that person, or

• your ownership interest ends within two years of the deceased's death.

For a dwelling acquired by the deceased on or after 20 September 1985, the dwelling must have been used as the deceased's main residence just before their death and not used to produce assessable income at that time.

In your case, you owned the dwelling as the trustee of the deceased estate. The dwelling was the deceased's main residence prior to death, and at that time, was not being used to produce assessable income. Subsection 118-130(3) of the ITAA 1997 provides that where the sale or other disposal of the dwelling proceeds under a contract, the ownership interest ends at the time of settlement of the contract of sale and not at the time of entering the contract.

The dwelling sale settled more than two years after the deceased's death, therefore, the alternative basis of exemption is also not satisfied.

However, subsection 118-195(1) of the ITAA 1997 confers on the Commissioner discretion to extend the two year exemption period.

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 determining whether or not to grant an extension the Commissioner is also expected to consider whether and to what extent the dwelling is used to produce assessable income and how long the trustee or beneficiary held it.

In your case the main reason for the Commissioner not exercising the discretion is the length of time that the property was used to earn assessable income.

A second reason for not exercising the discretion is that there was no impediment to the sale of the dwelling. The Executor could have decided to sell the dwelling and use to the proceeds to meet the expenses of the spouse or to re-invest them for the spouse's benefit.

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.

The normal capital gains tax (CGT) rules will apply to the disposal of the dwelling.