Edited version of private advice

Authorisation Number: 1052093217866

Date of advice: 7 March 2023

Ruling

Subject: Main residence exemption 2-year discretion

Question

Will the Commissioner exercise their discretion to allow a period longer than two years to dispose of the property under section 118-195 of the Income Tax Assessment Act 1997?

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

Person A and Person B purchased Property A as joint tenants.

The property is less than 2 hectares and has never been used to produce assessable income

Person A passed away and their share of the property was transferred to Person B

Person B later died intestate.

The property was transferred Person C, being Person A and B's son, as sole administrator of Person B's estate.

Person C allowed their sibling, Person D, to move into the property and it became their principal place of residence due to mental health issues. There is no documentation available concerning Person D's health conditions.

Person C allowed his sibling to stay rent free in the property

Due to the financial demands of the upkeep of the property the decision was made to dispose of it

The contract for sale was signed approximately six years after Person B's death

Person C passed away during the settlement period.

You, as Person C's spouse, were granted letters of administration in respect of the proceeds of the sale of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 subsection 118-195(1)

Reasons for decision

Under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997), 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 ends at the time of settlement of the contract of sale.

In your case, the deceased acquired the property after 19 September 1985. After the deceased passed away, you owned the property as trustee of the estate. 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 sale settled more than two years after the deceased's death. Therefore, you require the exercise of the Commissioner's discretion under subsection 118-195(1) of the ITAA 1997 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 two 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 favourable factors that the property was Person A and Person B's main residence up until their deaths, and was never used to produce assessable income

We considered that Person C made the choice to allow his sibling to stay in the property rent free for the period, and then when it became too expensive to upkeep they then made the choice to sell the property. These were choices made in the best interests of Person D's welfare, but they were not circumstances outside Person C's control. The sale of the property occurred approximately four years outside the 2-year period since Person B's death, amounting to a considerable delay.

In addition, you have been unable to provide any medical evidence (for example, a certificate or letter from a Doctor or specialist) in regards to Person D's mental health conditions, as such we are unable to exercise the Commissioner's discretion on this basis.

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.