Edited version of private advice

Authorisation Number: 1051633583342

Date of advice: 18 February 2020

Ruling

Subject: Commissioners discretion to extend the two year period to sell an inherited 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 2019.

The scheme commences on

1 July 2018.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Deceased purchased the property before 20 September 1985 (the Dwelling).

A few years later the Deceased and their spouse (Life Tenant) lived in the Dwelling as their main residence.

Many years later the Deceased passed away.

The Dwelling was the Deceased's main residence at their time of death.

Under the terms of the Last Will and Testament of the Deceased:

·                 The Public Trustee was named as Executor and Trustee of the Deceased's estate;

·                 The Life Tenant was granted a right to occupy the Dwelling for so long as they shall be living; and

·                 The Deceased's children - Child A and Child B (You) were named beneficiaries of the Dwelling in equal shares after the passing of The Life Tenant.

Whilst the Dwelling was willed to You, a dispute between the Public Trustee and The Life Tenant arose. In order to resolve this matter the Title to the Dwelling was officially transferred to You in equal shares to end any involvement with the Public Trustee.

Many years after the Deceased passed away the grandchild of the Deceased, who lives overseas, advised you of their intentions to purchase the Dwelling.

The Grandchild continued to advise you of their intention to purchase the Dwelling however needed time to organise their finances.

Not long after the Grandchild said they would purchase the Dwelling the Life Tenant passed away.

For a short while after the Life Tenant passed away the Dwelling remained vacant.

After the Dwelling remained vacant the Dwelling was rented out through a real estate until the Dwelling was sold.

You received a letter from a property developer asking if You were contemplating selling the Dwelling without engaging real estate agents.

A short time later the Grandchild advised you they did not wish to proceed with the purchase of the Dwelling.

On the same day, You advised the rental agent that the then present lease contract would not be renewed.

A few months later the rental agent advised you in writing that the tenants were not ready to vacate the Dwelling until they were able to secure another rental lease.

You received a letter from a second property developer advising You that they are disappointed you were not able to agree to an off market price on the sale of the Dwelling for their best offer of $X,XXX,000.

You agreed to the offer from the second property developer.

The second property developer refused to sign a contract with tenants and a rental contract in place.

A few months later the rental lease expired and the tenants returned the keys.

The next week the contracts for the sale of the Dwelling were signed.

Two months later settlement occurred on the Dwelling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-130

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

Further issues for you to consider

None

Anti-avoidance rules

None

Reasons for decision

Detailed reasoning

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that capital gains tax (CGT) is incurred when a CGT event takes place and either a capital gain or a capital loss results. Any capital gain is added to any other assessable income for the relevant year and is then taxed at the appropriate marginal tax rate. A capital loss can be offset against other current year capital gains or carried forward indefinitely to be offset against future year capital gains.

The most common CGT event is known as CGT event A1 and generally occurs whenever there is a change in ownership of a CGT asset from one party to another.

CGT and deceased estates

Section 128-20 of the ITAA 1997 explains that where a taxpayer dies, there are no CGT implications where an asset passes to the legal personal representative or beneficiary, but CGT may apply when the asset is subsequently disposed of. Assets forming part of the deceased estate are deemed to have been acquired by the representative or the beneficiary at the date of death of the deceased.

You therefore acquired your ownership interest in the Dwelling on the date your parent passed away.

Full main residence exemption

Subsection 118-195(1) of the ITAA 1997 states that if you owned a dwelling in your capacity as trustee of a deceased estate (or if it passed to you as a beneficiary of an estate), then you are exempt from tax on any capital gain made on the disposal of the property if:

·                 the property was acquired by the deceased before 20 September 1985; or

·                 the property was acquired by the deceased on or after 20 September 1985 and the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income and one of

·                 your ownership interest ends within 2 years of the deceased's death (the Commissioner has discretion to extend this period in certain circumstances); or

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

a)               the spouse of the deceased immediately before the death; or

b)               an individual who had a right to occupy the dwelling under the deceased's will; or

c)               if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary - that individual.

In this situation, to be CGT exempt, you can sell the Dwelling up to two years after the Deceased's death, or longer, if the Commissioner allows, or you can sell the Dwelling after someone's life interest ends if it were their main residence from the deceased's date of death. But you cannot have both.

In your case, your ownership interest in the Dwelling did not end within 2 years of the death of the deceased.

However, the right of the Life Tenant to occupy the dwelling under the Will created an impediment to the sale of the dwelling.

When the Life Tenant passed away in 20XX, the '2 year' period (which ended 20 years prior), did not restart.

On the date of death of the Life Tenant, it was your responsibility to sell the dwelling as soon as it was practicable to do so.

Many months after the life tenancy (the original impediment to sale) was extinguished, the property was rented out.

The sale of the Dwelling took place several years after the impediment to sale was removed. This is not as soon as practicable, especially as another potential impediment to sale (renting the dwelling out) was put in place after the life tenancy expired.

As a result a full exemption under section 118-195 of the ITAA 1997 will not be available; however a partial main residence exemption will apply up until the date that the life tenant passed away in accordance with section 118-200 of the ITAA 1997.

Partial exemption

Although you are not eligible for a full main residence exemption section 118-200 of the ITAA allows for a partial exemption if:

(a)             you are an individual and your ownership interest in a dwelling passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

(b)             section 118-195 of the ITAA 1997 does not apply.

You calculate your capital gain or capital loss using the formula:

Capital gain or capital loss is the amount that you made from the disposal of the dwelling (before applying any main residence exemption).

Non-main residence days is the sum of:

(a)             if the deceased acquired the ownership interest on or after 20 September 1985 - the number of days in the deceased's ownership period when the dwelling was not the deceased's main residence; and

(b)             the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of one of the following:

-                  a person who was the spouse of the deceased (except a spouse who was permanently separated from the deceased)

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

-                  you, as a beneficiary, if you disposed of the dwelling as a beneficiary.

Total days is:

(a)             if the deceased acquired the ownership interest before 20 September 1985, the number of days from the deceased's death until you disposed of your ownership interest; or

(b)             if the deceased acquired the ownership interest on or 20 September 1985 - the number of days in the period from the acquisition of the dwelling by the deceased until you disposed of your ownership interest.

In your situation, the non-main residence days are the number of days from The Life Tenants death until settlement of the Dwelling.

The total days are the number of days from the date of the deceased's death until settlement of the sale of the Dwelling.

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.