Edited version of private advice

Authorisation Number: 1052020543197

Date of advice: 1 September 2022

Ruling

Subject: CGT - inherited property

Question 1:

Will the Commissioner exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 ('ITAA 1997') to allow an extension to the 2-year limit to DD MM YYYY for the Capital Gains Tax ('CGT') exemption on the sale of the inherited dwelling that was the main residence of the deceased?

Answer:

Yes

This ruling applies for the following periods

DD MM YYYY to DD MM YYYY

The Scheme commences on

DD MM YYYY

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Background information

1.      The deceased acquired the property located at XYZ ('the Property') on DD MM YYYY.

2.      On DD MM YYYY, the deceased passed away.

3.      The deceased's sole real property was transferred, about one month prior to the death of the deceased, to Taxpayer A.

4.      The XXX Land Title Transfer document showed the property was transferred from the deceased to Taxpayer A as a joint tenant for the total sum of $X.

5.      Following the death of the deceased, the Applicant obtained probate as the Executor of the Estate under the deceased's will, which was dated DD MM YYYY.

6.      On or about DD MM YYYY, the Applicant commenced Supreme Court proceedings to recover the Property on behalf of the Estate that was transferred to Taxpayer A.

7.      On or about DD MM YYYY, the parties settled the Supreme Court proceedings.

8.      The Supreme Court Orders were made, but not limited to the following:

•           the Property transfer to Taxpayer A prior to the death of the deceased was unjust,

•           Taxpayer A to transfer the whole of the Property back to the Estate,

•           The Property to be listed for sale within X days of Taxpayer vacating the Property andthe Applicant becoming the registered proprietor.

9.      The Applicant's solicitor made a request to the XXX Land Titles Office for the Property to be transferred to them on or about DD MM YYYY.

10.   The XXX Land Titles Office processed the transfer of ownership from Taxpayer A to the Applicant on or about DD MM YYYY.

11.   Between DD MM YYYY and DD MM YYYY, the Applicant was in negotiations with various Real Estate Agents seeking quotes to sell the Property.

12.   On or about DD MM YYYY, the Applicant listed the Property for sale, and the Property was sold at public auction on DD MM YYYY.

13.   The Property was never used for the purpose of producing assessable income.

14.   Settlement of the Property occurred on DD MM YYYY.

Information provided

15.   You have provided a number of documents containing detailed information in relation to the Applicant's private ruling application, including:

•           Private Binding Ruling ('PBR') Application, dated DD MM YYYY

•           Response to further questions provided

16.   We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Assumption(s)

Not applicable.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 118-130(3)

Income Tax Assessment Act 1997 section 118-195

Further issues for you to consider

Not applicable.

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

Summary

The Commissioner will exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 to allow an extension to the 2-year limit to DD MM YYYY for the Capital Gains Tax ('CGT') exemption on the sale of the inherited dwelling that was the main residence of the deceased.

Detailed reasoning

17.   Subsection 118-195(1) of the ITAA 1997 outlines the following with regard to a dwelling acquired from a deceased estate:

(1)          A capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if:

(a)          you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

(b)          at least one of the items in column 2 and at least one of the items in column 3 of the table below are satisfied; and

(c)          the deceased was not an excluded foreign resident just before the deceased's death.

18.   Subsection 118-130(1) of the ITAA 1997 defines ownership interest in a dwelling as having a legal interest of the dwelling until it ends on settlement of the property.

19.   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, as follows:

(3) For land or a dwelling where you have a contract for the happening of the *CGT event, you have an ownership interest in it until your legal ownership of it ends.

20.   Paragraph 1 of Practical Compliance Guideline PCG 2019/5 - "The Commissioner's discretion to extend the 2 year period to dispose of dwellings acquired from a deceased estate", states that section 118-195 ITAA 1997 disregards capital gains and capital losses made from certain CGT events that happen in relation to a dwelling that was a deceased person's main residence and not being used to produce assessable income just before they died, or was acquired by the deceased before 20 September 1985.

21.   Paragraph 2 of PCG 2019/5 states that if you disposeof an ownership interest in a dwelling that passed to you as an individual beneficiary or as the trustee of the deceased's estate within 2 years of the deceased's death, any capital gain or loss you make on the disposal is disregarded. The Commissioner has the discretion to extend the 2 year period.

22.   Paragraph 3 of PCG 2019/5 states that, generally, we will allow a longer period where the dwelling could not be sold and settled within 2 years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first 2 years.

23.   Paragraph 12 of PCG 2019/5 outlines the circumstances that take more than 12 months to resolve, which will be considered by the Commissioner:

•                     the ownership of the dwelling, or the will, is challenged

•                     a life or other equitable interest given in the will delays the disposal of the dwelling

•                     the complexity of the deceased estate delays the completion of administration of the estate, or

•                     settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of your control.

24.   Paragraph 15 states that factors that would weigh in favour of the Commissioner allowing a longer period include those listed in paragraph 12 of PCG 2019/5 above. The absence of some or all of those favourable factors does not necessarily preclude us from allowing a longer period.

Application to your circumstances

25.   Considering the provisions of subsection 118-195(1) of the ITAA 1997, a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if:

a)            you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

b)            at least one of the items in column 2 and at least one of the items in column 3 of the table (see previous section) are satisfied; and

c)            the deceased was not an excluded foreign resident just before the deceased's death.

26.   In this matter, the deceased acquired the property on DD MM YYYY. As per Item 1 in Column 2 as set out in subsection 118-195(1) of the ITAA 1997, the deceased acquired the ownership interest on or after 20 September 1985 and the dwelling was the deceased's main residence just before their death and was not being used for the purpose of producing assessable income.

27.   The deceased passed away on DD MM YYYY.

28.   Following protracted Supreme Court proceedings, the property was transferred to the Applicant in DD MM YYYY. Between DD MM YYYY and DD MM YYYY, the Applicant was in negotiations with various Real Estate Agents seeking quotes to sell the property. The property was listed for sale and sold at auction on DD MM YYYY, with settlement occurring on DD MM YYYY.

29.   As per Item 1 in Column 3 as set out in subsection 118-195(1) of the ITAA 1997, the Applicant's ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner.

30.   Having considered all the relevant facts, the protracted Supreme Court proceedings and how soon after the 2-year limit the dwelling was sold, the Commissioner will apply the discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the 2 year time limit until DD MM YYYY, the date of settlement of the property and the date when the Applicant's ownership interest ends.

Conclusion

The Commissioner will exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 to allow an extension to the 2-year limit to DD MM YYYY for the Capital Gains Tax ('CGT') exemption on the sale of the inherited dwelling that was the main residence of the deceased.

ATO view documents

Practical Compliance Guideline PCG 2019/5 - "The Commissioner's discretion to extend the 2 year period to dispose of dwellings acquired from a deceased estate"

ATO view

Not applicable

Other relevant comments

Not applicable

Key words

Capital Gains Tax (CGT)

Deceased Estate

Ownership Interest