Edited version of private advice

Authorisation Number: 1052092633639

Date of advice: 6 March 2023

Ruling

Subject: Main residence exemption 2-year discretion

Question

Will the Commissioner exercise their discretion provided in section 188-195 of the Income Tax Assessment Act 1997 to allow a period longer than two years for the disposal of your share of Property B?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You father passed away. Before his death, your father lived at property A as his main residence and did not use the property for income producing purposes for any period before his death.

Approximately two months later, you contacted the solicitor who was named in your fathers will (solicitor A) who agreed to sign a renunciation of probate.

You engaged a new solicitor (solicitor B) who communicated with solicitor A for the next two months, Solicitor B then notified you that they were having difficulty contacting XXXX.

Approximately 6 months after your father's death, Property A was transferred into yours and your sister's joint names.

A month after Property A was transferred into your joint names, Solicitor B advised that there were ongoing issues with Solicitor A and their lack of willingness to sign the renunciation of probate, and had engaged their own representing solicitors.

Your mother passed away. She lived at Property B as her main residence and did not use the property for income producing purposes for any period before her death.

That same month, communication with solicitor B about your mother's estate commenced.

Around a month later you sent your solicitor a video of a document signing.

Approximately 15 months after your father's death, you moved into Property B.

Later that month, you emailed your solicitor to follow up on both your mothers and father's estates.

Three months later, you had ongoing correspondence with your solicitor regarding your father's estate.

In that same month, property B was transferred into yours and your sister's joint names.

Three months later you were advised by the firm that Solicitor B had left the firm (date unknown) and you made a face-to-face appointment with a new solicitor (Solicitor C) to review mother's and father's estates.

Approximately two months later your father's estate was settled

Around a month after the settlement, two years and three months after your father's death and approximately 1 year and 5 months after your mother passed away, discussions about you and your sister each owning one of the properties commenced.

The following month your mother's estate was settled.

Approximately three months later, and one year and 10 months after your mother's death, your sister moved into Property B.

Around the same time, you gave birth after some issues during the end of your pregnancy.

The following month you had discussions with your lawyers about transferring the properties so you owned one each.

The following month you reached a final agreement to proceed with the ownership transfer.

Around the end of that month, the properties changed ownership into individual names on both properties, with you becoming 100% owner of Property A and your sister the 100% owner of Property B.

Relevant legislative provisions

section 118-195 of the ITAA 1997

subsection 118- 195(1) of the ITAA 1997

Reasons for decision

A capital gain or capital loss may be disregarded where a capital gains tax event happens to a dwelling if you owned it as the trustee or beneficiary of the deceased estate.

For a dwelling acquired by the deceased after 19 September 1985, that was the deceased's main residence and not used to produce assessable income just before their death, you will be entitled to a full exemption if your ownership interest ends within two years of the deceased's death. Your ownership interest usually ends at the time of settlement of a contract of sale.

In your case, the deceased acquired the property after 19 September 1985. The property was the deceased's main residence until just before they passed away and was not used to produce assessable income at that time.

The property settled more than two years after the deceased's death. Therefore, you require the Commissioner's discretion to extend the two-year period to be eligible for an exemption.

Practical Compliance Guideline PCG 2019/5 Capital gains tax and deceased estates - the Commissioner's discretion to extend the 2-year period to dispose of dwellings acquired from a deceased estate provides guidance on factors we consider when deciding whether to grant the discretion.

Paragraph 3 of PCG 2019/5 provides that 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.

Paragraph 14 of PCG 2019/5 explains we weigh up all of the factors (both favourable and adverse). Paragraph 17of PCG 2019/5 provides a list of other factors that may be relevant to the exercise of the Commissioner's discretion which includes the sensitivity of your personal circumstances.

In your case, we consider as a favourable factor that there were difficulties associated with the original executor and delays with the new solicitor getting them to sign a renunciation of probate.

We also considered that the property was transferred into yours and your sister's joint names, but there was no decision made on what to do with the property until 16-17 months after your mother's death and you disposed of your interest in the property outside the two-year period. Additionally, there were ongoing periods of inactivity in relation to the estate and specifically the property.

The personal circumstances related to the complications during the end of your pregnancy and birth occurred in the last few months of the two-year period since your mother's death and did not exist for a significant period of the first two years. There had been no action taken to dispose of your interest in the property prior to April 20XX.

Having considered the relevant facts, we will not apply the discretion under subsection 118- 195(1) of the ITAA 1997 to allow an extension to the two-year time limit. Therefore, the normal capital gains tax (CGT) rules will apply to the disposal of the property. You should note that the first element of your cost base for the property is its market value on the deceased's date of death. The cost of repairs can also be included in the cost base of the property. You are also entitled to the 50% CGT discount in relation to the property.