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 ending 30 June 2024 The scheme commenced on: 1 July 2023
The deceased passed away a couple of years ago. The deceased acquired a property before 20 September 1985. The property was less than 2 hectares. The property was not the main residence of the deceased. The property was used to derive assessable income. After the date of death, the property was not the main residence of the spouse of the deceased, a beneficiary under the will, or someone who had a right to occupy the dwelling under the will. Probate was granted shortly after the date of death. An agent approached the trustee not long after the deceased passed away on behalf of several development companies to see if they would be interested in selling. An offer from Company Z was made prior to Probate being granted. A few months later the trustee signed a Memorandum of Understanding agreeing to price and terms of offer from Company Z. In the following year, Company Z pulled out of the agreement. A new offer to buy the property was received from another property developer, Company Y. The trustee accepted the offer. The sale contract was conditional upon the contemporaneous settlement of several apartments.
Initial deadline for all contracts was set for a few months after the offer, deadlines were continually extended due to some owners in the apartment complex negotiating with Company Y. The final deadline was not met due to the actions of other apartment owners. Property settled in the second half of the following year.
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 in a dwelling, 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 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; 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 20 September 1985, 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. 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. 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 dwelling have been resolved, the dwelling needs to be placed on the market as soon as possible to enable its disposal.
In considering whether to extend the two-year period in subsection 118-195(1) of the ITAA 1997, all the factors both in favour and against the granting of the Commissioner's discretion must be considered. How much weight we give to each factor will depend upon the circumstances of each case. Paragraph 19 of PCG 2019/5 provides we will not allow a longer period for even a very short delay beyond 2 years if there are no relevant circumstances present. Likewise, a lengthy delay will not prevent us from allowing a longer period where relevant circumstances caused the delay and persisted for the overwhelming majority of the total period. Application to your circumstances It's evident the trustee demonstrated an intention to sell the property. Probate was granted a couple of months after the date of death and the first contract for sale was entered into within 12 months from the deceased's passing.
As per paragraph 12 of PCG 2019/5, the Commissioner would be expected to exercise the discretion where settlement of a contract of sale over the dwelling is delayed or falls through for reasons outside the beneficiary or trustee's control. It's acknowledged the delay in settlement was caused by actions of other apartment owners and developers which is outside the trustee's control. However, entering a sale contract conditional upon the contemporaneous settlement of a number of apartments, is within the trustee's control. Selling to property developers is more complex than a traditional sale of a single apartment. When Company Z offer was withdrawn after several months, the trustee did not attempt to market and sell the dwelling separately on the open market. We consider the delay in the disposal of the property is attributed to the choice the trustee made in entering the selling arrangement. Delays in the settlement would be expected given the nature of the conditional contract. Another factor we considered in exercising the discretion is the period the property was used to produce assessable income. This is considered an unfavourable factor in exercising the discretion.
It is for the above reasons the Commissioner will not exercise the discretion under Section 118-195 of the ITAA 1997 to allow an extension of the two-year time limit. Therefore, the normal CGT rules will apply to the disposal of the dwelling. Note that the first element of the cost base for the dwelling is its market value on the deceased's date of death. The 50% CGT discount also apply in relation to the dwelling. You are required to declare the capital gain in the Trust tax return.