Edited version of private advice

Authorisation Number: 1051990806700

Date of advice: 1 July 2022

Ruling

Subject: CGT - main residence exemption

Question 1

Will the Commissioner allow an extension of time to 11 February 20XX for you to dispose of your ownership interest in the dwelling and disregard the capital gain or loss you make?

Answer

No.

Detailed reasoning

Question 2

Will the Commissioner allow the main residence exemption to be partially applied as one of the beneficiaries was living in the property as their main residence both before and after the deceased's date of death?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

6 May 20XX

Relevant facts and circumstances

The deceased owned the property which they acquired on 23 March 20XX.

The deceased lived in the property as their main residence until their date of death.

The property comprises of less than 2 hectares.

The property was not used to produce assessable income.

The deceased died on 6 May 20XX.

On 16 July 20XX Probate was granted.

The property title never passed to the beneficiaries and was sold by the trustee of the estate.

One of the beneficiaries had been living at the property with the deceased at the date of death and continued living in the property until the property sale was settled.

On 29 October 20XX the beneficiaries entered an agreement outlining the conditions to be met if one of the beneficiaries is to purchase the property from the estate.

On 17 March 20XX one of the beneficiaries applied for a loan to purchase the property.

On 20 March 20XX one of the beneficiaries lawyer wrote to the trustee of the estate to request more time to obtain a loan as the beneficiary needed to apply for a new birth certificate to progress the loan application.

On 5 May 20XX the trustee of the estate wrote to one of the beneficiaries to confirm she will 'hold' the finance for the other beneficiary and ultimately the distribution of the estate for this period, until finance can be approved for the other beneficiary in September 20XX.

In July 20XX the beneficiaries application for a loan was declined.

On 15 November 20XX the property was listed for sale.

On 1 December 20XX the contract to sell the property was entered.

On 11 February 20XX the property settled and titles were transferred.

Relevant legislative provisions

Income Tax Assessment Act 19997 section 118-110

Income Tax Assessment Act 19997 section 118-195

Income Tax Assessment Act 19997 section 128-15

Income Tax Assessment Act 19997 section 128-20

Reasons for decision

Detailed reasoning

Question 1

Subsection 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss made on a dwelling acquired from a deceased estate may be disregarded if:

•         The property was acquired by the deceased estate 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 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).

Practical Compliance Guideline PCG 2019/5: The Commissioner's discretion to extend the two-year period to dispose of dwelling acquired from a deceased estate outlines the factors that the Commissioner will consider when determining whether to exercise his discretion to extend the two-year period under section 118-195 of the ITAA 1997. Generally, the Commissioner will allow a longer period where the sale of the dwelling could not be settled within two years of the deceased's death due to reasons beyond your control that existed for a sizeable portion of the first two years and there are no significant factors that weigh against the allowing of an extension.

In considering whether to extend the two-year period all the factors both in favour and against the granting of the Commissioner's discretion must be considered.

Paragraph 13 of PCG 2019/5 states that in order to qualify for safe harbour, none of the following circumstances can have been material to the delay of disposing of your interest:

•         Inconvenience on the part of the trustee or beneficiary to organise the sale of the house

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

In your circumstance, it is noted that the delay in the sale of the property was due to the reliance on a beneficiary being able to purchase the property from the estate which later fell through due to changes in lending criteria. Furthermore, the beneficiary was allowed to reside in the property without the legal entitlement to do so, which attributed to the delay in the administration of the estate. To this end, we consider there were significant periods of inactivity in attending to the sale of the property due to waiting on the beneficiary's loan application outcome. Consequently, this is not a factor that is considered beyond the control of the trustee to achieve a sale.

Question 2

Subsection 118-110(1) of the ITAA 1997 provides that a capital gain or capital loss you make from a Capital Gains Tax (CGT) event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if:

a)    you are an individual; and

b)    the dwelling was your main residence throughout your ownership period; and

c)    the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person.

Division 128 of the ITAA 1997 contains rules that apply when an asset owned by a person just before they die, passes to their legal personal representative (LPR) or to a beneficiary in a deceased estate.

Subsection 128-15(3) of the ITAA 1997 provides that any capital gain or capital loss the LPR makes if the asset passes to a beneficiary in your estate is disregarded.

Under section 128-20 of the ITAA 1997, an asset passes to a beneficiary in a deceased estate if the beneficiary becomes the owner of the asset:

(a) under your will, or that will as varied by a court order; or

(b) by operation of an intestacy law, or such a law as varied by a court order; or

(c) because it is appropriated to the beneficiary by your legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate; or

(d) under a deed of arrangement if:

(i) the beneficiary entered into the deed to settle a claim to participate in the distribution of your estate; and;

(ii) any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other Capital Gains Tas (CGT) assets that formed part of your estate.

It does not matter whether the asset is transmitted directly to the beneficiary or is transferred to the beneficiary by your legal personal representative.

In your case, the title of the property had not passed to the beneficiaries from the trustee before the settlement of the property and therefore the beneficiaries did not have an ownership interest or the legal entitlement to reside in the property as their main residence. In this regard, it is considered that the trustee possessed ownership of the property at all relevant times. Therefore, the requirements under subsection 118-110(1) of the ITAA 1997 are not satisfied and consequently the main residence exemption cannot be applied.