Edited version of private advice

Authorisation Number: 1051806757698

Date of advice: 22 February 2021

Ruling

Subject: Capital gains tax

Question

Will the Commissioner allow an extension of time to 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 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased purchased the property prior to 1985 with their spouse as joint tenants.

The property was a private residence but not their main residence for the whole of the ownership period.

The deceased acquired the spouse's share of the property on mid 20XX.

The deceased died on early 20XX.

Probate was granted early 20XX.

The property was never used to derive income.

Settlement for the property occurred early 20XX.

The estate had three executors, all of the deceased's children (Executors A, B and C).

Executor A suffered injuries from an accident overseas in 20XX and had on going medical treatment along with seeking compensation from the overseas insurance company.

In addition to this Executor A was also diagnosed with a terminal illness in 20XX.

The family in 20XX were contemplating the sale of the property.

It was not until the 20XX income year that Executor A was able to physically and mentally turn their mind to their duties as joint executor of the estate.

Executor A has had a number of operations.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

A capital gain or capital loss may be disregarded under section 118-195 of the Income Tax Assessment Act 1997 (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.

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.

However, subsection 118-195(1) of the ITAA 1997 confers on the Commissioner discretion to extend the two years 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 years 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 from the date of death of the deceased and settlement.

The executors took more than X years to sell the property.

While the experiences of Executor A are unfortunate, they did occur prior to the deceased's death.

We do appreciate that a number of operations have occurred during the period from the deceased's death until the property sold in 20XX.

There were two other executors who could have organised the sale of the property within the two years time frame.

The facts provided to the Commissioner state that it was not until 20XX that the family even considered the sale of the property which was two years after death.

Alternative administrative arrangements could have been put in place given the circumstances of Executor A.

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 years time limit.

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