Edited version of private advice

Authorisation Number: 1052033794279

Date of advice: 3 October 2022

Ruling

Subject: CGT - deceased estate - 2-year discretion

Question

Will the Commissioner exercise the discretion in section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) and extend the main residence exemption for the property situated at XXXX?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

The deceased passed away on DD MM YYYY.

The deceased acquired the property on DD MM YYYY.

The property was the main dwelling of the deceased until X years prior to their death when they needed higher level of care, they moved to their child's house for this care.

The property was situated on less than 2 hectares of land.

The property was not producing assessable income.

The deceased's last Will dated DD MM YYYY appointed their children as Executors and Trustees of the deceased estate.

Probate was granted DD MM YYYY, approximately X months after the date of the deceased's death.

One of the beneficiaries used the property from the day the deceased vacated until just prior to settlement.

The beneficiary didn't have the right to occupy the dwelling under the Will.

The deceased property had large amounts of rubbish which had been collected for over X years, this was completed between the periods MM YYYY to MM YYYY, within X months of the date of death.

Due to Covid-19 lockdowns in XXX you faced difficulties in finding tradespeople in to do the repairs.

X of the X Trustees lost their jobs due to Covid-19, which meant that there were no funds available to make the repairs.

Various repairs and maintenance were completed between the periods MM YYYY to MM YYYY;

•                     Repair & replace all cracked, broken, missing roof titles causing water damage

•                     Replacement off broken, cracked & missing windows throughout the house

•                     Replacement of all faulty and damaged electrical wiring sockets and light connections to compliance level

•                     Plumbing excavate & trench replace 60m of 100m storm water drains clearing major blockages and root growth establish flow to main barrel drain. Clear and replace faulty down pipes and guttering and connect and test all new components

•                     Replace interior plumbing hardware in kitchen, laundry, bathroom and toilet, taps, pipes, cistern & shower.

•                     Replacement of all pool system pump and filtration system components - pool contractor orders all parts.

•                     Replacement of front door and portico area all supporting timbers, weight bearing and structural components due to rotted timbers from years of water damage requiring the whole front entrance structure to be replaced including all interior and exterior ceiling supports.

•                     Replastering and painting ceilings due to water damage and construction activity detailed above

Real Estate agents were engaged on DD MM YYYY, approximately X months after the date of death.

The property sold on the DD MM YYYY with settlement date DD MM YYYY, almost X months after the 2-year period had expired and X years X months after the date of death.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Detailed reasoning

Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a capital gains tax (CGT) exemption to beneficiaries and trustees where a CGT event happened to a dwelling they acquired from a deceased estate.

Subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or loss may be disregarded where a capital gains tax event occurs disposing of a dwelling passed to a beneficiary of a deceased estate within 2-years of the deceased's date of death, or, from the deceased's death until the disposal, the dwelling was the main residence of:

•                     the spouse of the deceased immediately before the death; or

•                     an individual who had a right to occupy the dwelling under the deceased's Will; or

•                     the individual to whom the ownership interest is transferred as a beneficiary and is then sold by that individual.

Additionally, if the property was acquired after 20 September 1985, the dwelling must have been used as the deceased's main residence before their death and not used to produce assessable income.

In this instance the house was not occupied by a spouse, no individual had the right to occupy under the deceased's will, and the property was not occupied by a beneficiary to whom the property had been transferred under the will.

Practical Compliance Guideline PCG 2019/5: The Commissioner's discretion to extend the 2-year period to dispose of dwellings acquired from a deceased estate outlines the factors that the Commissioner will consider when determining whether or not to exercise the discretion to extend the 2-year period under section 118-195 of the ITAA 1997. Generally, the Commissioner will allow a longer period where the sale of the dwelling could not be settled within 2 years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first 2 years. However, PCG 2019/5 provides that the following factors weigh against the Commissioner allowing a longer period:

•                     You waited for the property market to pick up before selling the dwelling

•                     Delay was caused to the disposal of the property due to refurbishment of the house to improve the sale price

•                     Delay to disposal of the dwelling was caused as a result of inconvenience on the part of the trustee or beneficiary to organise sale of the dwelling, or

•                     Delay was caused by unexplained periods of inactivity by the executor in attending to the administration of the estate.

Application to your circumstances

The deceased passed away on DD MM YYYY. Two years from this date is DD MM YYYY. As at DD MM YYYY your ownership interest had not ended. The relevant capital gains tax (CGT) event did not occur until DD MM YYYY. You contend that the delays were primarily due to the trustees and beneficiaries of the estate did not have sufficient funds to carry out the renovation works all at once due to X of the X trustees and beneficiaries losing their jobs, the renovations were undertaken over time as cash became available this was also impacted by the COVID19 pandemic lockdowns, and the decision of the trustees and beneficiaries to allow the deceased's child to continue to occupy the property.

You contend that the delays were primarily due to the trustees and beneficiaries of the estate not having sufficient funds to carry out the renovation works all at once due to X of the X trustees and beneficiaries losing their jobs, the renovations were undertaken over time as cash became available this was also impacted by the COVID19 pandemic lockdowns, and the decision of the trustees and beneficiaries to allow the deceased's adult child to continue to occupy the property.

In applying the legislation to your circumstances in the view of the Commissioner of Taxation, there is no specific event or situation that occurred, outside of the trustees' or executors' control, causing a delay in the sale of the deceased's interest in the property.

Refurbishment of the dwelling caused a material delay and was the most significant delay in you disposing of your interest in the dwelling. However, the delay in selling the property was not outside your control. In your circumstances, you were able to control whether or not to undertake the refurbishments prior to listing the property for sale.

Whilst it is accepted that the COVID19 pandemic is a circumstance beyond your control, a number of the renovations/maintenance tasks were commenced and completed within the 2-year period, both prior to and during the pandemic, including removal of rubbish and personal items, tile repair, initial window repairs, some plumbing, and re-wiring. However, a significant portion of the work was commenced or completed too close to the expiration of the 2-year period to allow the sale to be completed within 2 years, or was not commenced or completed until after the 2-year period had expired, including, further window replacement, pool pump replacement, further plumbing, front door and portico, and replastering and painting of ceilings.

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, in particular to continue with repairs/maintenance beyond the 2-year period. The work was a preference, not a necessary prerequisite, to facilitate a sale.

The delays in the sale of the property were due to choices made regarding the property, not due to circumstances beyond your control. The delays due to storm damage occurred after the 2-year period had elapsed. The property initially went on the market X years X months post date of death and inspections recommenced following the storm damage, approximately X months after the initial listing.

As per ATO Interpretative Decision 2003/109 Capital Gains Tax: deceased estate - main residence exemption. An individual would be considered to occupy a dwelling under the deceased's will if it was in accordance with the terms of the will. The only intent that can be reasonably inferred is that the deceased gives you and your sibling ownership of the dwelling, but it does not give any beneficiaries the right to reside/occupy.

ATO ID 2004/882 affirms the Commissioner's view that allowing a beneficiary, even with a right to reside stipulated within the Will of the deceased, to stay beyond that period, does not entitle the trust or estate an extension to the 2-year rule under section 118-195 of the ITAA 1997. In your situation, there is no right under the Will for XXX to reside in the property.

The Commissioner has not exercised the discretion to extend the 2-year period to dispose of a dwelling under section 118-195 of the ITAA 1997. Therefore, any capital gain made on the property from the date the deceased passed away until the property is disposed of will be taxable. That is, the first element of your cost base for the property is its market value on the deceased's date of death. The cost of the refurbishments can also be included in the cost base of the property.

As section 118-195 of the ITAA 1997 does not apply, you may be entitled to a partial exemption of the capital gain or capital loss made on the disposal of the property under section 118-200 of the ITAA 1997.

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