Will the Commissioner exercise the discretion under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension of time to dispose of the ownership interest in the property (the Property) and disregard the capital gain made on the disposal?
No. This ruling applies for the following period : Year ended 30 June 2023 The scheme commenced on: 1 July 2022
The deceased passed away a few years ago. The deceased lived at the property, as their main residence for the whole of their ownership period. The property was purchased by the deceased a few decades ago. The property was never used to produce income. The property was less than 2 hectares in size. Probate was granted a couple of years ago. You were the beneficiary of the deceased's estate. At the time of the deceased's death your child was living at the property with the deceased acting as their carer. Your child was also studying. You were reluctant to unsettle your child and remove them from the property while studying and coping with the difficulties of Covid. During a period of several months, your child continued to occupy the property. The circumstances of your child leaving the property was a result of a job offer. Covid also meant that you could not attend to the sale of the property as there was an extended period of lock down where you were not able to travel to the property. You and your family also had covid throughout this period which meant isolation for a week at a time.
You were also not aware that capital gains tax may apply if the property was not sold within the legislated 2 year time period. You made contact with a real estate agent. A stylist visited the property a few weeks later. The first open home was held in the following month. The property was sold several weeks after the open home. The sale of the property resulted in a capital gain.
Income Tax Assessment Act 1997 section 118-110 Income Tax Assessment Act 1997 section 118-195
The main residence exemption in section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to disregard a capital gain or capital loss a taxpayer makes from a capital gains tax (CGT) event that happens to a dwelling that is their main residence. If a taxpayer inherits an ownership interest, subsection 118-195(1) of the ITAA 1997 applies so that any capital gain or capital loss they make from a CGT event that happens in relation to a dwelling or their ownership interest in a dwelling is disregarded if: • They are an individual and the interest passed to them as a beneficiary in a deceased estate, or they owned it as the trustee of a deceased estate; and • The deceased acquired the ownership interest on or after XX September 19XX 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; and • Their ownership interest ends within two years of the deceased's death, or within a longer period allowed by the Commissioner.
Where the deceased acquired the property prior to XX September 19XX the dwelling was from the deceased death until your ownership interest ends the main residence of one of the following: • the spouse of the deceased immediately before their death (but not a spouse who was permanently separated from the deceased) • a person who has a right to occupy the property under the deceased's will • you, as a beneficiary, if you dispose of the property as a beneficiary. Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example: • The ownership of a dwelling or a will is challenged. • The complexity of a deceased estate delays the completion of administration of the estate. • A trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury).
• Settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control. Factors that would weigh against the granting of the discretion include: • Waiting for the property market to pick up before selling the dwelling. • Property used to earn assessable income. • Unexplained periods of inactivity by the executor in attending to the administration of the estate. The above examples are not exhaustive. In addition, once any circumstances preventing the sale of the Property have been resolved, the Property needs to be placed on the market as soon as possible to enable its disposal. Application to your circumstances: The delay in selling the property was due to you allowing your child to remain living in the property after the deceased passed away. The reasons for them remaining in the property according to you are that they were living in it as their main residence, and you were reluctant to unsettle them by removing them from the property while studying and dealing with the difficulties of covid.
In addition to this you were not aware that an inherited property was required to be sold within a legislated 2-year time period or capital gains would apply. In this regard, we consider that the delay was not outside your control. It is for the above reasons that you do not meet the requirements for the Commissioner to extend the 2-year time period as the property could have been sold at an earlier stage. The Commissioner will not be exercising his discretion to extend the 2-year period for you to dispose of the Property. Therefore, any capital gain made on the property from the date the deceased passed away until the Property was disposed of will be subject to tax.