Edited version of private advice

Authorisation Number: 1051662308879

Date of advice: 30 April 2020

Ruling

Subject: Capital gains on deceased estate

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 until settlement?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

December 20XX

Relevant facts and circumstances

The deceased's spouse passed away in X 20XX leaving behind, the deceased who then resided at an Aged Care facility.

The deceased was the sole beneficiary of to the late spouse's estate.

The property was the main asset, of the estate and main residence until they moved to the Aged Care facility.

The property was purchased prior to 20 September 1985.

After the passing of the deceased, the property was maintained on weekends by family members due to high costs. The executors found this increasingly difficult as they had homes of their own and families to consider. The property was rented and entered into a one year rental contract, in XX 20XX.

The deceased passed away XX 20XX.

The rental contract was not renewed and the house was vacant after XX 20XX.

The tenants did not take care of the property which left the executors of the estate with many jobs to do to prepare the house for sale. Minor repairs were done to the property to get it ready for sale.

Finally the house was ready for sale in XX 20XX, so a real estate agent was engaged to sell the property.

The agent's recommendation was to auction the house. The auction took place in XX 20XX. No bid was received.

The property went back on the market and an offer was received subject to finance in XX 20XX. This offer was accepted subject to finance. However the buyers asked for several extensions which were accepted. In XX 20XX, the finance fell through and the property went back on the market.

An unconditional offer was received in XX 20XX. This offer was accepted and the property was sold in XX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 section 118-195

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

Reasons for decision

Under section 118-195 ITAA 1997, a full exemption can apply on sale of a dwelling inherited from a deceased individual if the property was the deceased's main residence just before their death and was not being used to produce income at that time and either:

·   the property is sold within two years of the date of death (the Commissioner can extend this period); or

·   the property has been the main residence of the deceased's spouse, someone granted a right to live in the property under the terms of the deceased's will or the individual beneficiary who is selling the property from the date of death until the property is sold.

Furthermore, on 27 June 2019, the Commissioner introduced Practical Compliance Guideline PCG 2019/5 which provides the executor with a safe harbour where the deceased's property cannot be sold and settled within two years of the deceased's death.

In certain circumstances you're exempted from capital gains tax (CGT) on an inherited dwelling if you dispose of your ownership interest within two years of the person's death.

You can apply to us to extend the two-year period. Generally, we would grant the extension if the delay is due to circumstances outside your control, such as:

·   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)

·   settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary's or trustee's control.

Absence rule

Section 118-145 of the ITAA1997 provides that if a dwelling was your main residence, you may continue to treat it as your main residence. If you use your main residence to produce assessable income, the maximum that you can treat it as your main residence is six years. If you make the choice to treat the dwelling as your main residence whilst you are absent, you may not treat any other dwellings as your main residence whilst you choose to use the absence exemption in section 118-145 of the ITAA 1997.

The property continued to be the deceased main residence prior to its sale. The property was rented out for a period of time, this period of time was less than six years and the absence rule can apply. Accordingly, the property can be treated as the deceased main residence for capital gains tax purposes for the entire period of ownership and any capital gain can be disregarded on its disposal.

Having considered your circumstances and the relevant factors, the Commissioner will allow an extension of time with regards the treatment of Capital Gains Tax. Further information about this discretion can be found by searching 'QC 52250' on ato.gov.au