Edited version of private advice

Authorisation Number: 1051800977412

Date of advice: 01 February 2021

Ruling

Subject: Capital gains tax

Question

Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and extend the two year period to the XXXX?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2021

The scheme commences on:

1 July 2020

Relevant facts and circumstances

Your relative passed away.

You inherited a property from your relative.

The property was your relative's main residence.

Your relative appointed you as the executor and trustee of their will.

The property was deteriorated and your relative hoarder a large amount of items in the property.

Your legal representation advised you that if you performed works on the property to make it liveable for a purchaser that the additional beneficiaries of the estate may contest the will.

This delayed you clearing the horded items from the property and commencing the works on the property to make it liveable for a purchaser.

The will was not contested.

The sale of the property was finalised.

Relevant legislative provisions

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

Reasons for decision

Subsection 118-195(1) of the ITAA 1997 states that if you own a dwelling in your capacity as trustee of a deceased estate (or 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

•   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: -

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

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

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

You have an ownership interest in a property if you have a legal interest in the property. This means that if you sell a property, your ownership interest continues until the date of settlement (rather than the date the contract of sale is signed).

In this case, the property was purchased by the deceased after 20 September 1985 and was their main residence until they passed away. The property was not sold within 2 years of the deceased's date of death.

Therefore, you will only be able to disregard the capital gain from the sale of the property if the Commissioner extends the 2 year time period.

The Commissioner can exercise his discretion in situations such as where:

•   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 circumstances outside the beneficiary or trustee's control

Application to your circumstances

You inherited the property as trustee of your late relatives' estate after their passing. Your late relative let the property deteriorate and hoarded a great deal of items in the property. You were advised by your solicitor that the other beneficiaries of the estate may contest your late relatives will if you arranged to have the property liveable for a purchaser. Therefore, you did not arrange to have the property cleared of the hoarded items or begin works on the deteriorated property until approximately XX months after your late relatives passing.

Additionally, instead of selling the property as is or after the hoarded items where cleared out of the property, you held onto the property and choose to renovate the property in order to make it liveable for a purchaser. An online search of the properties address shows photographs as well as a detailed description of the renovations performed on the property which indicate that there have been significant capital renovations and not repairs to the property.

The Commissions view on the difference between capital works and a repair are addressed in Taxation Ruling TR 97/23 Income tax: deductions for repairs as well as in two leading Australian cases FC of T v. Western Suburbs Cinemas Ltd (1952) 86 CLR 102; (1952) 9 ATD 452 and the Lindsay case (affirmed on appeal at (1961) 106 CLR 377; 12 ATD 505).

110. In the Western Suburbs Cinemas case, the ceiling of a motion picture theatre was in a state of disrepair. To restore the ceiling to its original condition would have cost #603. The company instead replaced the ceiling with a new one of a different design and better material for a cost of more than #3,000. The High Court (Kitto J) concluded that the new ceiling was an improvement to a fixed capital asset and that its cost was a capital charge. His Honour said at 86 CLR 105; 9 ATD 454:

'To decide whether a particular item of expenditure on business premises ought to be charged to capital or revenue account is apt to be a matter of difficulty, though the difference between the two accounts is clear enough as a matter of general statement (Sun Newspapers Ltd v. Federal Commissioner of Taxation). In this case, the work done consisted of the replacement of the entire ceiling, a major and important part of the structure of the theatre, with a new and better ceiling. The operation seems to me different, not only in degree, but in kind, from the type of repairs which are properly allowed for in the working expenses of a theatre business. It did much more than meet a need for restoration; it provided a ceiling having considerable advantages over the old one, including the advantage that it reduced the likelihood of repair bills in the future.... The truth is, I think, that the new ceiling was an improvement to a fixed capital asset and that its cost was a capital charge.'

111. In Lindsay v. FC of T (1960) 106 CLR 197; 12 ATD 505, the High Court (Kitto J) held that expenditure incurred to renew a slipway was a renewal of an entirety and not a deductible repair. His Honour said at 106 CLR 383; 12 ATD 200:

'If the work done in respect of the slipway is correctly described as repairs, it cannot, I think, on the facts of this case, be of a capital nature. The problem is to characterize the expenditure according to the familiar distinction between repair, in the sense of restoration by renewal or replacement of subsidiary parts of a whole, and renewal in the sense of reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole of the subject matter under discussion: per Buckley L.J., in Lurcott v. Wakely & Wheeler; Rhodesia Railways v. Collector of Income Tax, Bechuanaland'.

In order to determine whether an item of expenditure is to be held on general principles to be chargeable to income or capital account, it is of course necessary to distinguish between "the business entity, structure or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay"...: Sun Newspapers Ltd and Associated Newspapers Ltd. v. Federal Commissioner of Taxation [(1938) 61 CLR 337 at pp 359, 360]. But where the question is whether expenditure has been for repairs, and for the purpose of deciding that question one asks what is the entirety which it is relevant to consider, one is looking not for a profit-earning structure or entity, as such, but for a physical thing which satisfies a particular notion.'

Your situation is comparable to that of example 3 within Practical Compliance Guideline PCG 2019/5 The Commissioner's discretion to extend the two year period to dispose of dwellings acquired from a deceased estate where the extension to the 2 year period was not granted due to significant renovations being performed on the inherited property.

29. Mr Wong lived in a dwelling that was his main residence until he died on 1 January 2016. Mr Wong acquired the dwelling before 20 September 1985.

30. On 14 July 2016, a severe storm damaged the dwelling, which required repairs before it could be advertised for sale. As well as completing repairs, the trustee also engaged builders to undertake other significant renovations to improve the value of the dwelling before sale. Work was completed on 18 May 2017.

31. The dwelling was listed for sale on 26 June 2017 and actively managed until eventually sold. Settlement occurred on 17 January 2018.

32. Although the storm damage was outside of the control of the trustee, and the property was sold shortly after the two year period, the trustee cannot rely on the safe harbour because the most significant factor in delaying the sale was the decision to renovate the dwelling, which was entirely within the control of the trustee.

Whilst the state of your late relatives property is outside your control, the choice to perform significant renovations to the property to make it liveable for a purchaser is a decision was in the control of the trustee of your relatives estate, therefore is not considered an unforeseen or serious personal circumstance.

Having considered the relevant circumstances, the Commissioner will not exercise his discretion and extend the two year time limit