Edited version of private advice

Authorisation Number: 1052037319756

Date of advice: 5 October 2022

Ruling

Subject: CGT - extension to the 2-year period

Question

Will the Commissioner exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the two-year period to dispose of the property?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away on XX/XX/20XX.

The property was the deceased's main residence since it was purchased before 1985 (the property).

The family and executor of the estate experienced a very challenging and extended period of emotional distress.

The executor of the estate (the executor) leased out the property for an initial term on XX/XX/20XX.

The executor of the estate decided to renew the lease twice (additional two terms) until XX/XX/20XX.

Near the end of the final lease, it was identified that the tenant was in significant breach of the lease terms and conditions, including rent unpaid.

Legal action was required to be taken to remove the tenant.

The tenant vacated the property on XX/XX/20XX.

The property was handed back in an extremely poor state.

The executor took immediate steps to repair and prepare the property for sale.

The property was auctioned on XX/XX/20XX.

Settlement occurred on XX/XX/20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

The main residence exemption in section 118-110 of the ITAA 1997 applies to disregard a capital gain or capital loss a taxpayer makes from a 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 either before 20 September 1985; or 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

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
• a life or other equitable interest given in the will delays the disposal of the dwelling
• the complexity of a deceased estate delays the completion of administration of the estate.
• settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of your control.

Factors that would weigh against the granting of the discretion include:

• waiting for the property market 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 trustee or beneficiary to organise the sale of the house, or
• unexplained periods of inactivity by the executor in attending to the administration of the estate.

Other factors that may be relevant to the exercise of the Commissioner's discretion include but are not limited to:

• the sensitivity of your personal circumstances and/or of other surviving relatives of the deceased
• the degree of difficulty in locating all beneficiaries required to prove the will
• any period the dwelling was used to produce assessable income, and
• the length of time you held the ownership interest in the dwelling.

In determining whether it is appropriate to allow an extension to the two-year period, we must take into account the purpose of the two-year period. Previously the period allowed for the disposal of a deceased's dwelling was 12 months. Chapter 5 of the Supplementary Explanatory Memorandum to the Taxation Laws Amendment Bill (No.3) 1997 explains that the reason for the change in the law to extend the period allowed from 12 months to two years was to give beneficiaries and trustees more time to arrange the orderly sale of the property.

That is, the Parliament recognised that it could take some time for a deceased's property to be sold. There will be a period of grief and time needed to make funeral arrangements before the trustee and beneficiaries will even consider dealing with the property. They also recognised that issues may arise which can delay the property being sold. For example, probate may take some time; the deceased may have accumulated many items in their property that need some time to go through and deal with; or a sale of the property may fall through. To take into account that these types of issues can arise, they extended the period allowed to dispose of a deceased's property from 12 months to two years.

Application to your circumstances

In this case, the family and executor of the estate experienced a very challenging and extended period of emotional distress and personal loss with the death of their parent. Nevertheless, they were able to prepare the property so that it could be rented out and the executor chose to lease out the property for X months, then chose to renew the lease a further two times so that the lease ended on XX/XX/20XX which was only just over two months before the expiry of the two-year period on XX/XX/20XX. That is, they only gave themselves just over two months from the end of the lease until settlement had to take place.

The executor would have known that during this short period they had to have the tenant leave, get the property ready for sale, find a buyer and fit in a settlement period. The executor relied on everything going perfectly according to their plan. However, it is not uncommon that tenants have to be forced to leave, properties are damaged and need to be repaired after a tenancy ends, sales fall through, and buyers ask for longer settlement periods. The executor assumed that none of these issues would occur. As stated previously, the two-year period allowed is to take into account that unexpected issues can arise which mean that selling a deceased's property can take two years. It was the executor's choice to effectively reduce the period they had to sell the property from two years down to just over two months. The fact that the property was not disposed of within the two-year period was primarily a result of the executor's choice to rent out the property for most of that period rather than due to matters outside of their control.

The executor has referred to the impact of COVID-19 preventing them from selling the property. However, it is our understanding that during the pandemic, the market for selling properties was still strong, that is, many properties were sold during this time. The executor has not explained exactly how the impact of COVID-19 meant it was not possible for them to sell the property any earlier. Also, it is our understanding that due to COVID-19 it was more difficult for landlords to evict tenants. Therefore, by choosing to rent out the property during the pandemic they took the risk that it may have been difficult for them to remove the tenant. Consequently, it is our view that the impact of COVID-19 does not support their case, rather it is actually a factor that weighs against them, as by initially renting out the property then continuing to renew the lease, they chose to accept the risk that during the pandemic it may be more difficult, and take more time, to evict the tenant if need be.

It is for the above reasons that the estate does not meet the requirements for the Commissioner to extend the two-year time period as the property could have been sold at an earlier stage.

The Commissioner will not be exercising the discretion to extend the two-year period 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 CGT. That is, the first element of the cost base for the property is its market value on the deceased's date of death. The 50% CGT discount also applies in relation to the property.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).