Edited version of private advice

Authorisation Number: 1052255419615

Date of advice: 27 May 2024

Ruling

Subject: Domestic relationship - deceased estate 2-year discretion

Question 1

Under section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) was the deceased and ex-spouse in a genuine domestic relationship as a couple?

Answer

No.

Question 2

Will the Commissioner exercise the discretion under section 118-195 of the ITAA 1997 to allow an extension of time so that the capital gain made on disposal of the dwelling can be disregarded?

Answer

No.

This ruling applies for the following period:

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The taxpayer's parent (the deceased) passed away on XX month 20XX.

The deceased owned a property.

The land was purchased by the deceased in 19XX.

A house was built on the land in approximately 19XX.

No improvements have been made to the property and it remains in its original condition.

The deceased and the spouse (the taxpayer's parent) were legally divorced in 19XX with neither of them remarrying.

Around October 20XX, the taxpayer's parent moved back into the property to care for her ex-spouse, the deceased.

The deceased had health issues prior to passing away.

This was only as a care relationship and the taxpayer's parent stayed in another room in the property.

During the time staying at the property, the taxpayer's parent kept a tenancy arrangement with social housing, which was in another neighbouring suburb.

The tenancy was held through until November 20XX. This was due to the nature of obtaining public housing.

The property and the public housing property were within 5 to 10 minutes of each other.

When the deceased passed away in month 20XX, the taxpayer solely inherited the property.

The title was transferred to the taxpayer around month 20XX.

Under the deceased's will, there was no provision included for a right to occupy the property.

The taxpayer allowed the parent to continue to live in the property after the deceased passed.

The parent did not pay rent while living in the property. The parent only paid for the bills and utilities as required.

The taxpayer sought to make the parent more comfortable in the property as this was their former family home where the parent had raised their family.

The taxpayer's parent remained living in the property, alone, up until passing away in June 20XX.

The taxpayer's parent required care at various stages throughout their later years in respect of domestic duties including assistance with lawns, shopping, medications, transportation, doctors' visitations and other domestic duties.

A large part of retaining the property was its location and proximity to public transport to assist the taxpayer's parent in getting to appointments.

The taxpayer's parent was treated for an illness in 19XX which required hospitalisation and treatment. This was successfully managed with regular monitoring.

The taxpayer's parent also suffered from other medical conditions prior to their passing.

The property remained vacant after the taxpayer's parent passed away.

The taxpayer had never lived in the property.

The property was sold at auction on XX month 20XX with a settlement date of XX month 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 subsection 118-200

Issue

Question 1

Summary

The Commissioner is not satisfied that the deceased and ex-spouse, although not legally married to each other, lived with each other on a genuine domestic basis in a relationship as a couple.

Question 2

Summary

Having considered the relevant facts, the Commissioner is not able to apply his discretion under Section 118-195 of the ITAA 1997 and allow an extension of time to the two-year period.

Reasons for decision

Question 1

Section 995-1 of the Income Tax Assessment Act 1997 defines your spouse as:

(a) another individual (whether of the same sex or a different sex) with whom the individual is in a relationship that is registered under a *State law or *Territory law prescribed for the purposes of section 2E of the Acts Interpretation Act 1901 as a kind of relationship prescribed for the purposes of that section; and

(b) another individual who, although not legally married to the individual, lives with the individual on a genuine domestic basis in a relationship as a couple.

There is no requirement in the definition to be legally married according to the laws of Australia or another nation. However, the definition states that the person must live with the person on a genuine domestic basis as the person's husband or wife. The term 'husband and wife' is not defined in tax legislation, therefore the ordinary meaning of the term is utilised.

The relationship between the deceased and the taxpayer's parent (former spouse) does not fall within the ordinary everyday meaning of a husband and wife. The deceased and the taxpayer's parent have been divorced since 19XX. The deceased became ill, and the taxpayer's parent moved into the deceased's property to care for the deceased in the year 20XX. The taxpayer's parent held onto their government housing property, which the parent had lived in prior to moving into the deceased's property, until month 20XX.

Based on the facts in this case, the Commissioner believes that the taxpayer's parent only lived with the deceased to care for the deceased before their passing away, not in a relationship as a couple and had an intention to move back into their government housing property.

The taxpayer's parent does not satisfy the definition of a spouse to the deceased as defined in section 995-1 of the ITAA 1997 as the deceased and the taxpayer's parent were not living in a genuine domestic basis as 'husband and wife' or as a couple.

Question 2

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 prior to 19 September 1985, as per the table in section 118-195 ITAA 1997 you will be entitled to a full exemption if your ownership interest ends within two years of the deceased's death or the dwelling was, from the deceased's death until your ownership interest ends, the main residence of the spouse, an individual who has the right to occupy under the deceased's will, or a beneficiary (if the property was disposed of by that beneficiary). Your ownership interest ends at the time of settlement of the contract of sale.

In this case, the deceased acquired the property prior to 19 September 1985. The property sale settled more than two years after the deceased's death. As per question 1, the taxpayer's parent does not satisfy the definition as being a spouse of the deceased, the taxpayer never lived in the property (as a beneficiary of the estate) and there was not a right to occupy the property under the deceased's will.

The circumstances do not satisfy the conditions as per the table in section 118-195 ITAA 1997 to allow a full exemption, therefore, the taxpayer requires the Commissioner's discretion to extend the two-year period to be eligible for an exemption.

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 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.

The taxpayer, as per the deceased's will, had legal ownership of the property. The taxpayer allowed the parent to continue to live in the property up until their passing away in month 20XX as it would be more comfortable, convenient and gave the security of residence for the taxpayer's parent.

Whilst we appreciate the circumstances that the taxpayer allowed the parent to continue living in the property, ultimately the circumstances fail to satisfy paragraph 3 of PCG 2019/5 in that within the two-year period of the deceased's death, there were no reasons beyond the estate's control that prevented the property from being disposed. A related issue is that the period of time for which the extension is sought is considered lengthy for PCG 2019/5.

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. You are also entitled to the 50% CGT discount in relation to the property.

Subsection 118-200(1) of ITAA 1997 states that if a deceased estate does not qualify for a full exemption under section 118-195 of ITAA 1997, it may qualify for a partial exemption in certain circumstances.

In determining whether a partial exemption applies, the following formula in subsection 118-200(2) is to be used:

(Capital gain or Capital loss amount × Non-main residence days) ÷ Total days

Section 118-200 provides that where the property was acquired prior to 20 September 1985, the following definitions apply:

•         'Non-main residence days' is the sum of the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of the individual referred to in item 2, column 3 of the table in section 118-195.

•         'Total days' is the number of days in the period from the death until your ownership interest ends

As the taxpayer does not qualify for a full exemption, the taxpayer qualifies for a partial exemption as the property was the main residence of the deceased prior to passing away.

The partial exemption will be calculated in accordance with the formula in subsection 118-200(2) of the ITAA 1997. In this case, the non-main residence days used in the formula are considered to be the number of days in the period commencing when the deceased passed away and ending when the taxpayer ceased to own the property as the property was acquired by the deceased prior to 20 September 1985.