Edited version of private advice

Authorisation Number: 1052042384047

Date of advice: 6 October 2022

Ruling

Subject: Commissioner's discretion - extension of time

Question:

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 xx XX 20XY 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

x XX 20XX to y YY 20YY

The Scheme commences on

x XX 20XX

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 purchased the property located at XYZ ('the Property') on xx YY 19XX.

2.      The Property was the deceased's main residence until the time of her death on yy YY 20YY.

3.      The Property was never used for the purpose of producing assessable income. Since the deceased's death, the Property remained vacant.

4.      The Property was held in the joint names of ABC and CBA as the joint executers of the estate.

5.      The plan for the property was that the household effects belonging to the deceased were to be sorted, and then the Property readied for sale to third parties within the 2 year period from the date of death.

6.      The ownership of the Property and the Will of the deceased are not being challenged by the joint executors or any other parties.

7.      The plan to clean out and sell the Property was delayed exclusively by COVID and related travel restrictions.

8.      The property could not be cleaned and emptied while the deceased was still alive as it was her wish that the Property remain hers and be available to her with her personal effects and contents.

9.      Following the deceased's death, ABC and CBA were both subject to COVID restrictions in their home states and could not attend the property to clean it.

10.   Throughout 20YY, both ABC and CBA made enquiries for third parties to be engaged to pack up the house and clean it ready for sale, however the COVID restrictions made it difficult to find third parties that were able to perform the job within the constraints of the COVID restrictions at the time. No third parties were able to be engaged to perform this service.

11.   After the COVID lockdowns were lifted and travel resumed, the Property was cleared and advertised for sale as soon as possible. The property was sold for $xyx, with the contract signed on yy YY 20YY.

12.   Settlement of the Property occurred on xx XX 20XY.

13.   The new owners of the Property, as at the date of settlement, are not related to the deceased.

Information provided

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

•           Private Binding Ruling ('PBR') Application, dated xx YY 20YY

•           Response to further questions provided

15.   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 a longer period to 4 July 2022 for the Capital Gains Tax ('CGT') exemption on the sale of the inherited dwelling that was the main residence of the deceased.

DETAILED REASONING

16.   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.

17.   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.

18.   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.

19.   Paragraph 1 of 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", 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.

20.   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 two 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 two year period.

21.   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 two years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first two years.

22.   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.

23.   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

24.   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.

25.   In this matter, the deceased acquired the property on xx YY 19XX. 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 the deceased's death and was not then being used for the purpose of producing assessable income.

26.   The deceased passed away on yy YY 20YY.

27.   Following the deceased's death, COVID restrictions prohibited travel and it was difficult for the Executors to engage third parties to clean out and prepare the Property for sale.

28.   The Executors listed the property for sale as soon as possible after COVID restrictions were lifted. The property was sold on yy YY 20YY. Settlement of the Property occurred on xx XX 20XY.

29.   As per Item 1 in Column 3 as set out in subsection 118-195(1) of the ITAA 1997, ABC and CBA'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 and the protracted COVID related restrictions, the Commissioner will apply the discretion under subsection 118-195(1) of the ITAA 1997 and allow a longer period until xx XX 20XY, the date of settlement of the Property and the date when ABC and CBA'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 a longer period to xx XX 20XY 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 two 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