Edited version of private advice

Authorisation Number: 1051666894269

Date of advice: 27 April 2020

Ruling

Subject: Deceased estate - two year discretion

Question

Will the Commissioner allow an extension of time for you to dispose of your ownership interest in the dwelling and disregard the capital gain you made on disposal?

Answer

Having considered your circumstances and the relevant factors, the Commissioner will allow an extension of time.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your relative passed away on Month X 20XX.

This property was less than two hectares in size and served as the main residence of your relative until their passing. This property was purchased in 19XX.

The accountant that dealt with the estate failed to make you all aware of the capital gains tax implications of not selling the property within a two year period after your relative's passing.

The solicitor was inefficient in settling the will, completing the probate process and transferring the title into your names. Numerous phone calls and meetings were made to finalise this process. You found it difficult to get progress on the matter. You engaged a new legal firm to handle the sale of the property due to his slow performance.

There was another relative occupying the house who had health issues. You didn't want to create family conflict and force them to move out of the house, which was against your deceased relative's wishes, and put them under the further stress of finding a new place to live.

Probate took a number of years to be granted.

After the title had been transferred, you and your family spent many weekends cleaning and tidying the property for it to be in a reasonable state for sale. There was a large amount of rubbish removal and de-cluttering to be completed.

A real estate agent was engaged sometime after probate and the property was sold some months later.

The property was never rented out prior to its sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Reasons for Decision

These reasons for decision accompany the notice of private ruling

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

Extension of years on sale of deceased estate

Detailed reasoning

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it.

Under section 118-195 ITAA 1997, a full exemption can apply on sale of a dwelling inherited from a deceased individual if the property was the deceased's main residence just before their death and was not being used to produce income at that time and either:

• The property is sold within 2 years of the date of death (the Commissioner can extend this period); or
• The property has been the main residence of the deceased's spouse, someone granted a right to live in the property under the terms of the deceased's will or the individual beneficiary who is selling the property from the date of death until the property is sold.

This means that generally capital gains tax (CGT) is not payable in relation to the sale of a dwelling that was the deceased's main residence (and not used to produce assessable income at the time of the deceased's death) or a dwelling that was acquired by the deceased before 20 September 1985 if it is sold by the executor or beneficiary of the dwelling within two years of the deceased's death. When a property is sold it means that ownership of the dwelling must have changed within two years; the date of settlement or completion of the sale is relevant, not the date of the contract for sale.

ATO Discretion and Guideline

Practical Compliance Guideline PCG 2019/5 which provides the executor with a safe harbour where the deceased's property cannot be sold and settled within 2 years of the deceased's death.

The Commissioner has discretion to extend the two-year period during which the executor or beneficiary must sell the main residence or the pre-CGT dwelling. Under the Guideline, it is no longer necessary to apply to the Commissioner for the discretion to be exercised. If the executor or beneficiary has complied with the safe harbour compliance rules set out in the Guideline, the executor or beneficiary can manage their tax affairs as if the Commissioner had exercised the discretion to extend the two-year period by up to 18 months.

Safe Harbour Rule

To rely on the safe harbour rule, you must meet all of the following conditions:

1. During the first two years after the deceased's death, more than 12 months was spent addressing at least one of the following:
   1. a challenge to the ownership of the dwelling; or
   2. a challenge to the deceased's will; or
   3. a life or other equitable interest given in the will delays the sale of the dwelling; or
   4. delays caused by the complexity of the deceased estate; or
   5. settlement of the contract falls through or is delayed for reasons out of your control.
2. The dwelling was listed for sale as soon as practically possible after the circumstances preventing the sale were resolved and the sale was then actively managed until settlement.
3. The sale completed within 12 months of the dwelling being listed for sale.
4. None of the following were material reasons for the delay in selling the dwelling:
   1. waiting for the property market to improve;
   2. delays due to refurbishment to improve the sale price;
   3. inconvenience in arranging the sale; or
   4. unexplained periods of inactivity by the executor in administering the estate.
5. The additional period in which the sale occurs is no longer than 18 months after the initial two-year period.

Where an executor of an estate sells the deceased's main residence within two years of the deceased's date of death, any capital gain or loss will be disregarded, provided the property was not used to produce income.

Furthermore, the Commissioner may consider the discretion to extend this two year period in certain circumstances based on the cause of the delay which is more important than the length of the delay. You will not be granted any extension of time if there are no relevant favourable factors present that led to the delay.

Further information about this discretion can be found at "QC 52250" on ato.gov.au.

Application to your circumstances

In your circumstances, because of the delay in selling the dwelling was not caused by any of the circumstances described as favourable factors you cannot rely on the safe harbour.

The facts we considered as part of our decision making are that your probate was delayed due to the initial solicitor did not apply for the probate and you had to change to a new solicitor to get the probate approved. This prevented from attending to the sale of the estate for a significant period, and the fact that you took reasonable steps to resolve the sale as soon as practically possible after the probate.

The Commissioner in considering all the facts and circumstances of your case will exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and extend the 2 year period to the date of settlement of the property.

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