Edited version of private advice

Authorisation Number: 1051969721592

Date of advice: 6 April 2022

Ruling

Subject: Deceased estate 2-year commissioner discretion

Question 1

Will the Commissioner exercise their discretion under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the two-year period to dispose of the dwelling?

Answer

No.

Question 2

Will the Commissioner, pursuant to subsection 152-80(3) of the ITAA 1997, grant an extension of time to apply the CGT small business concessions in relation to the disposal of the farm?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

Year ending 30 June 2022

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The deceased passed during the year ended 30 June 2019.

The deceased was over 55 years at the time of their death.

The deceased inherited the dwelling and farm prior to 20 September 1985. The land was divided into parcels and the deceased inherited some of the parcels at this time.

Subsequently the deceased purchased a further parcel of land after 20 September 1985.

You and your siblings inherited the assets of the deceased in equal shares.

The farm business has operated through various activities including beef and cattle farming, wheat growing and agistment.

Had the farm business been sold by the deceased prior to their death they would have been able to reduce or disregard the capital gain on the sale of the farm under Subdivision 152B of the Income Tax Assessment Act 1997 (ITAA 1997).

Probate was granted six months after the deceased's death.

You and one of your siblings was named executor of the estate.

You engaged the services of a real estate agency seven months after the deceased's death.

Sale of the farm and dwelling was to be conducted in two stages:

1.     Clearing sale to precede the selling of the property

2.     Sale of the farm and dwelling

The clearing sale occurred nine months after the deceased's death.

The real estate agent advised the property required cleaning and repairs.

Your sibling, the other executor, resided on the property to conduct cleaning and repairs. Your sibling then returned to their interstate home.

Your sibling intended to return to the property to complete the cleaning and repairs to the property.

Due to uncertainty around the COVID19 pandemic and the state governments border closures, your sibling did not return to the property prior to sale.

Subsequently, a contract for sale was provided to the real estate agency on the second anniversary of the deceased's death.

Two years and three months after the deceased's death the family decided to list the property in its condition for sale due to uncertainty as to when border closure restrictions would ease.

The contract for sale was signed and supplied to the successful bidder two years and seven months after the deceased's death.

Due to purchaser delays settlement did not occur until two years and 10 months after the deceased's death.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 subsection 152-80 (3).

Reasons for decision

Sale of dwelling

Section 118-195 of ITAA 1997 allows a capital gain in relation to a dwelling to be disregarded if:

•                    You are an individual and the interest passed to you as a beneficiary in a deceased estate; and

•                    The deceased acquired the ownership interest before 20 September 1985 and your ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner; and

•                    The deceased was not an excluded foreign resident just before their death.

Application to your circumstances

You are an individual who had the interest in the dwelling pass to you as beneficiary in a deceased estate. The deceased was not an excluded foreign resident just before their death. Your ownership interest did not end within 2 years of the deceased's death and therefore to disregard any capital gain, you require a longer period of time to be allowed by the Commissioner.

The deceased passed away. Two years from the date of death your ownership interest had not ended. The relevant capital gains tax (CGT) event did not occur until after this time. You contend that the delays were primarily due to the impact of the COVID19 pandemic preventing your sibling's ability to return to the property whether this be due to border closures or perceived risk and hassle of quarantine periods.

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 outlines the relevant considerations that the Commissioner will consider in exercising the discretion.

Factors that weigh in favour of the Commissioner allowing a longer period of time are outlined in paragraph 12 of PCG 2019/5. These factors include ownership challenges, difficulty in locating all beneficiaries, complexity of administering the estate and settlement being delayed for reasons outside of your control.

Factors that weigh against the Commissioner allowing a longer period include those listed in paragraph 13 of PCG 2019/5. These factors include waiting for the property to pick up before selling the dwelling, delay due to refurbishment of the house to improve the sale price, inconvenience on the part of the beneficiary to organise the sale of the house or any unexplained periods of inactivity by the executor in attending to the administration of the estate.

On the facts, none of the factors outlined under paragraph 12 apply to your situation. It is accepted that purchaser delayed settlement, however this period occurred after the two-year time period and does not contribute towards any delay within this time. Therefore, the purchaser related delays experienced are not a relevant consideration as they occurred outside of the relevant period.

Whilst it is accepted that the COVID19 pandemic and border closures are circumstances beyond your control, the nature of the delay to sell the property was due to the decision by the family to clean and repair the property prior to sale. It was not a characteristic that the work needed to be completed to facilitate a sale. This is evidenced by the fact that despite the cleaning and repair work not being able to be completed the property was able to be listed for sale when the family decided to list the property for sale.

Accordingly, the conclusion that can be drawn is that the delays in the sale of the property were due to refurbishment of the property with the intention of improving the sale price. As this is the substantially relevant factor, and the material reason as to why the disposal was delayed, it would not be appropriate for the Commissioner to allow for an extension to the two-year period.

Small business capital gain concessions

Section 152-80 of the ITAA 1997 allows either the legal personal representative or beneficiary of an estate to apply the CGT small business concessions in respect of the sale of the deceased's asset in certain circumstances.

Specifically, the following conditions must be met:

•                    A CGT asset forms part of the estate of a deceased individual or was owned by a joint tenant who dies;

•                    The CGT asset devolves to the legal personal representative or passes to a beneficiary or the interest in the asset is acquired by surviving joint tenants or devolves to trustee of a trust established by the will of an individual;

•                    The deceased would have been entitled to reduce or disregard a capital gain from a CGT event under the small business concessions, immediately before their death;

•                     A CGT event occurred within two years of the deceased's death, with the exception of subsection 152-80(3) of the ITAA 1997, where the Commissioner can allow an extension of time.

Application to your circumstances

The farm is a CGT asset which formed part of the estate of the deceased individual. The farm devolved to the beneficiaries in accordance with the deceased's will. The deceased would have been entitled to reduce or disregard a capital gain from a CGT event under the small concessions immediately before their death. The CGT event did not occur within two years of the deceased's death and therefore in order to reduce or disregard any capital gain from the CGT event the discretion under subsection 152-80(3) will be required.

The two-year time limit prescribed may be extended by the Commissioner in certain circumstances. In determining whether a longer period will be allowed, the Commissioner will consider a range of factors such as:

•                    whether there is evidence of an acceptable explanation for the period of extension requested and whether it would be fair and equitable in the circumstances to provide such an extension;

•                    whether there is any prejudice to the Commissioner if the additional time is allowed, however the mere absence of prejudice is not enough to justify the granting of an extension;

•                    whether there is any unsettling of people, other than the Commissioner, or of established practices;

•                    fairness to people in like positions and the wider public interest;

•                    whether there is any mischief involved; and

•                    the consequences of the decision.

As outlined above under the sale of dwelling, the delay in the sale of the property is due to refurbishments to the property. As the facts that apply to the sale of the dwelling also apply to the sale of the farm, there are no additional facts that need to be considered for small business capital gains concessions purposes.

When considering the range of factors outlined above it is noted that:

•                    There is no prejudice to the Commissioner if the additional time is allowed

•                    There is no mischief involved

As noted previously the delay in the sale of the farm was primarily due to the family decision to make improvements to the property, ultimately with the intention of improving sale price. When considering all factors, as the delay was caused due to a factor within your control, it would not be considered fair and equitable in the circumstances to provide an extension to the period. It is not in the wider public interest to allow an extension of time for delays that are caused by a decision to attempt to obtain a larger sale price.

The Commissioner will not exercise the discretion under subsection 152-80(3) of the ITAA 1997.

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