Edited version of private advice

Authorisation Number: 1051652965504

Date of advice: 03 April 2020

Ruling

Subject: Deceased estates - main residence exemption - two year discretion

Question 1

Will you receive an extension to the two year period for disposal of the Dwelling (Apartment One) under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No. The Commissioner will not exercise his discretion to grant you an extension to the two year period for disposal of the Dwelling (Apartment One) under subsection 118-195(1) of the ITAA 1997.

Question 2

Can you disregard any capital gains made on the sale of the Dwelling (Apartment One) under subsection 118-195 (1) of the ITAA 1997?

Answer 2

No. As the Commissioner has not granted you an extension of time to dispose of the Dwelling (Apartment One), you do not meet the conditions to disregard any capital gains made on the sale of the Dwelling under section 118-195 of the ITAA 1997.

Question 3

Will you receive a partial exemption under subsection 118-200(3) of ITAA 1997 on the sale of the Dwelling (Apartment One)?

Answer 3

No. You do not satisfy the requirements for a partial exemption in subsection 118-200 (3) of the ITAA 1997. Paragraph 118-200(3) (b) requires that a dwelling must have been disposed of within two years of the death of the Deceased or a longer period allowed by the Commissioner. In this situation, the dwelling was not disposed of within two years of the death of the deceased. The Commissioner has also not allowed a longer period for disposal of the dwelling. Therefore, a partial exemption will not be granted.

This ruling applies for the following period:

Year ending 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The Deceased purchased a property (The Property) with their late spouse. At the time of purchase, The Property comprised vacant single commercial premises downstairs with one single flat upstairs on a single title.

The Deceased and their spouse purchased The Property as joint tenants.

The flat upstairs was rented from the date of purchase and started earning income for approximately XX months.

The Property was renovated extensively. The renovations took approximately XX months and doubled the size of the Property in square metres.

After the renovation of the Property, it consisted of 2 two bedroom flats and 1 three bedroom flat upstairs (Apartment 1). The size of the upstairs three bedroom flat was the same as the two downstairs flats combined.

The Deceased and their late spouse moved into the upstairs flat as soon as practicable following completion of renovations.

The Deceased's late spouse passed away and the Deceased acquired the remaining 50% share as a joint tenant.

The Deceased passed away. At the time of their death, Apartment 1 was their main residence and was not being used to produce assessable income.

One of the beneficiaries who resided in Apartment 3, one of the 2 apartments downstairs, initially wished to purchase the Property from the Estate as a syndicate. However, the Executors could not agree on the sale price and market value of the Property with the beneficiary. Therefore, the sale did not go ahead.

Throughout the period between the Deceased's death and the sale of the Property, real estate agents provided a range of valuations for the Property with large disparities between valuations.

The Property was first advertised for sale on XXXX.

The Will of the Deceased (The Will) appointed their children A, B and C as joint Executors and Trustees of their Will (The Executors). The Will stated that

in the event of any disagreement between them, the majority shall prevail.

Solicitors were engaged to provide professional advice and assist with the administration of the Estate.

The Property could not be sold separately as all apartments are on the same title. During the X year period The Property was advertised for sale the Executors engaged X number of real estate agencies to help sell it.

One of the beneficiaries is estranged from the family group, who constitute the remaining beneficiaries. This beneficiary made attempts to undermine the sale of the Property, resulting in delays to the sale.

Since the Deceased passed away, Apartment One has been rented out for a period of approximately X years. There were two periods where Apartment One was not rented out totalling approximately X months)

In XXXX, an offer was made for $X million to purchase the Property but was declined. Following this, subsequent offers were made in the months of X and X of XXXX. These offers were also declined. A further offer was made but this too was rejected.

A contract for the sale of the Property was signed on XXXX. Settlement occurred on XXXX. The sale price was $XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-195

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

Income Tax Assessment Act 1997 subsection 128-15(4)

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

Reasons for Decision

Summary

A period of two years is allowed for the sale of a dwelling, or interest in a dwelling acquired from a deceased estate under section 118-195 of the ITAA 1997.Under section 118-195(1), if a dwelling or interest in a dwelling is sold within this period, any capital gains made can be disregarded.

An extension to the two year period may be granted in certain circumstances.Examples of these circumstances are outlined in Practical Compliance Guideline2019/5 The Commissioner's discretion to extend the two year period to dispose of dwellings acquired from a deceased estate (PCG 2019/5)

In this instance, the Commissioner will not exercise the discretion to extend the two year period for disposal of a dwelling or interest in a dwelling acquired from a deceased estate.This means that you are not able to disregard any capital gains made on the sale of the Property.

In your circumstances, the delay in the sale of The Property does not meet the criteria for an extension of the two year period in subsection 118-195(1) of the ITAA 1997. Therefore, the Commissioner will not exercise his discretion to extend the two year period to disregard any capital gain or capital loss made on a CGT event that happens to a dwelling or your ownership interest in the dwelling.

In addition, as you don't meet the requirements in subsection 118-200 (3) of the ITAA 1997, you are ineligible for a partial main residence exemption on the sale of the Property.

Detailed reasoning

Question 1

The main residenceexemption in section 118-110 of the ITAA 1997 applies to disregard a capital gain or capital loss a taxpayer makes from a CGT event that happens to a dwelling that is their main residence.

If a taxpayer inherits an ownership interest, subsection 118-195(1) of the ITAA 1997 applies so that any capital gain or capital loss they make from a CGT event that happens in relation to a dwelling or their ownership interest in a dwelling is disregarded if:

·   They are an individual and the interest passed to them as a beneficiary in a deceased estate, or they owned it as the trustee of a deceased estate; and

·   The deceased acquired the ownership interest 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;

·   Their ownership interest ends within two years of the deceased's death, or within a longer period allowed by the Commissioner

Application to your situation

In considering whether to extend the two year period in subsection 118-195 (1) of the ITAA 1997, all the factors both in favour and against the granting of the Commissioner's discretion must be considered.

Factors in favour of granting the discretion include:

·   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.

Legal challenge

The Will of the Deceased stated that in the event of any disagreement between the Executors, the majority shall prevail. Following failure to agree on a sale price when one of the beneficiaries wished to purchase the Property as part of a syndicate, solicitors were engaged for professional advice. Although this caused some delays with the sale of the property, there were no legal challenges to either the will or the ownership of the Property. Therefore, this circumstance is not present.

Complexity of the estate

The second circumstance you included in support of your application was the complexity of the estate. Examples of complexity when dealing with a deceased estate can include multiple legal proceedings and uncertainty about the Will. In your instance, you have cited the number of beneficiaries, number of properties and the need for solicitor engagement to allow the Executors to communicate and make decisions as factors making the administration of the estate complex. However, although these factors may have caused some difficulties, they do not satisfy the criteria for complexity of administration. Therefore, this circumstance is not present.

Delayed contract settlement

The third circumstance relates to settlement of the contract being delayed or falling through for reasons outside your control. You state that you received valuations withlarge disparities between real estate agents for all the properties. This led to disputes between the Executors and further delays with the sale of The Property. You also state that there were delays due to the Executors and one of the beneficiaries being unable to agree on a sale price. Although these things may have caused a delay, they were not due to external factors and are therefore not out of your control. Therefore, this circumstance is not present.

Factors unfavourable to the granting of the discretion

Waiting for the property market to pick up before selling the dwelling

Information you have provided shows that in XXXX, an offer of $X million was made for the Property but was declined. Following this, subsequent offers were made. In XXXX, an offer was made to purchase the Property but this too was rejected. The Property was eventually sold for $X million. Where delays are due to waiting for the property market to pick up, this will be a factor that is unfavourable to the granting of the discretion.

Property used to earn assessable income

Following the Deceased passing away, the Property was rented out for a period. The Property was not rented out for a period of approximately X months in total following the Deceased passing away. Although not determinative, the fact that the Property was producing assessable income for the majority of the time between the Deceased passing away and the Property being sold is a factor mitigating against the granting of the discretion.

Unexplained periods of inactivity by the executor in attending to the administration of the estate.

The Property was first advertised for sale on XXXX. This was approximately X months after the Deceased passed away. Information you have provided to account for this delay is that one of the beneficiaries wished to purchase the Property as part of a syndicate. Although this resulted in some delays, the delays were ultimately in the control of the Executors who were administering the Estate.

Factors in favour of granting the discretion

The Property couldn't be sold separately as all X apartments are on the same title. This limited the number of buyers wishing to purchase the entire property. To assist with the sale of The Property you engaged four different real estate agencies.

You also experienced difficulties with communication and decision making between the Executors and the beneficiaries. This resulted in delays to the sale of the house. However, on balance the factors against the granting of the discretion outweigh those for the granting of the discretion. Therefore, the Commissioner has decided not to grant the discretion.

Question 2

As the Commissioner has not granted you an extension of time to dispose of the Dwelling (Apartment One), you do not meet the conditions to disregard any capital gains made on the sale of the Dwelling under subsection 118-195 of the ITAA 1997.

Question 3

You do not satisfy the requirements in section 118-200 (3) of the ITAA 1997. Paragraph 118-200(3) (b) requires that a dwelling must have been disposed of within two years of the death of the Deceased or a longer period allowed by the Commissioner. In this situation, a longer period for disposal of a dwelling has not been allowed by the Commissioner, nor has the Dwelling been disposed of within two years. Therefore, a partial exemption is not available on the sale of the Dwelling.