Edited version of private advice

Authorisation Number: 1051878777448

Date of advice: 10 August 2021

Ruling

Subject: Commissioner's discretion to extend the two-year time limit to dispose of an inherited house

Question

Will the Commissioner allow an extension of time to mid-20XX for you to dispose of your ownership interest in the house 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 commenced on:

1 July 20XX

Relevant facts and circumstances

At some time before 20 September 1985, the deceased's spouse bought the house.

At some time after 20 September 1985, the deceased's spouse transferred 50% ownership of the house to the deceased.

In 20XX, the deceased's spouse passed away. The deceased inherited the remaining 50% ownership interest and became sole owner of the house. The house was deceased main residence until they moved into aged care.

In 20XX, the deceased moved into aged care. The deceased chose to continue to treat the house as their main residence while living in aged care.

From mid-20XX to mid-20XX, the house was rented out.

In late 20XX, the deceased passed away.

From mid-20XX to mid-20XX, the house was vacant.

In late 20XX, repair works were completed on the house. A few months later, further repair works were completed. Both repair works were done over several weeks.

In early 20XX, you consulted with a real estate agent to launch a sales and marketing campaign. You appointed them as the Exclusive Auction Authority for the sale of the house.

Shortly after, an auction was scheduled but you cancelled it due to COVID-19 stage 3 restrictions. At this time, auctions were held online only, public auctions were banned, and private, in-person-only inspections introduced, in an effort to stop the spread of coronavirus.

During 20XX, on numerous occasions real estate services restrictions eased allowing public auctions and inspections.

From mid-20XX to early 20XX, the house was rented to a new tenant on a 12-month lease.

In early 20XX, the house was vacant, and you re-launched the sales and marketing campaign.

Shortly after, the house was sold and settled within XX and XXX years of when the deceased passed away.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 115-A

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-130

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-200

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:

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

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

o   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.

In your case, the deceased acquired two separate ownership interests in the house, both after

20 September 1985. The first, when the deceased's spouse transferred 50% ownership and the remaining 50% interest, when the deceased's spouse passed away.

When the deceased passed away, their interests in the house transferred to you. The house was deceased main residence until they moved into aged care. The deceased chose to continue to treat the house as their main residence while living in aged care until they passed away. However, at that time, the house was being used to produce assessable income. Therefore, you are not entitled to a full exemption.

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.

In your case, the house sale settled more than two years after the deceased's death. Therefore, you require the Commissioner's discretion to extend the two year exemption period to be eligible for a partial exemption.

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 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 reasons outside the beneficiary or trustee's control.

When deciding whether 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, one positive factor is that we consider six months is a short extension. However, the main reasons for the Commissioner not exercising the discretion are:

•         you chose not to prepare the house and list it for sale while it was tenanted for six months after the deceased passed away.

•         the time spent repairing the house represents only a small portion of the 10-month period the house was vacant and not listed for sale.

•         you were impacted by COVID restrictions on real estate services which caused you to cancel the planned auction. However, you chose not to reschedule the auction or explore other methods of sale. In mid-2020, as advised by your real estate agent, you took the house off the market, and signed a new tenant for 12 months. We note that on numerous occasions during 2020, real estate services restrictions eased providing opportunity to market the house and arrange a sale. However, you chose to rent the house out and wait until February 2021 (nine months after the planned auction) to relaunch the sales campaign.

Having considered the relevant facts, the Commissioner will not apply his discretion under subsection 118-200(3) of the ITAA 1997 and allow an extension to the two year time limit. Therefore, the normal capital gains tax (CGT) rules will apply to the disposal of the house.