Edited version of private advice

Authorisation Number: 1052062730254

Date of advice: 24 November 2022

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to the two-year period for executors of the estate to dispose of the property?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away in 20XX, aged over 90.

The trustees of the estate, children of the deceased (the Trustees), are aged in their sixties, acting jointly in accordance with their mother's will.

The main residence of the deceased was a property (the Property), was deceased's main residence until she passed away.

The Property has not been tenanted or otherwise occupied, and no improvements or refurbishments have been made since the date of acquisition or the date of death of the deceased.

The Property was sold in 20XX.

The Trustees made every effort to prepare the property for sale.

In addition, the following factors delayed the sale of the property:

• a serious medical condition of the spouse of one of the Trustee, which had significant impacts on the lives of the Trustees including their ability to progress the administration of the estate
• The procedural aspects that delayed the process included:
  • delay for an extended search for the original Title Deeds;
  • delay to Deed of Family Arrangement due to the complexity and necessity to establish funding arrangements to pay beneficiaries;
  • delay by Revenue NSW to process the Deed of Arrangement;
  • delay for the Registration of Title Deeds and replacement of lost Title deed;
• delay rectifying the administrative error of misspelling the name, by the Land Title's office;
• delay caused by NSW COVID-19 Public Health order, that was issued in March 2020, prevented the Trustees from travelling to the property and impacted the administration of the estate (dealing with lawyers, real estate agents, disposal of items to the charities).

Relevant legislative provisions

Income Tax Assessment Act 1997section 118-195

Income Tax Assessment Act 1997subsection 118-195(1)

Reasons for decision

All references made in these reasons for decision are to the Income Tax Assessment Act 1997 (ITAA 1997)unless otherwise stated.

Subsection 118-195(1) states that a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if:

• you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and
• both of the following requirements are satisfied:
  • 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
  • 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 the deceased's death.

In other words, the Commissioner has discretion to extend the two-year time period in subsection 118-195(1) where the trustee or beneficiary of a deceased estate's ownership interest ends after two years from the deceased's death.

Practical Compliance Guideline PCG 2019/5 Capital gains tax and deceased estates - the Commissioner's discretion to extend the 2 year period to dispose of dwellings acquired from a deceased estate (PCG 2019/5) provides guidance on circumstances in which the Commissioner may exercise his discretion in extending the two-year period. It outlines a safe harbour compliance approach that allows taxpayers to manage their tax affairs as if the Commissioner had exercised the discretion to allow them a period longer than two years.

Paragraph 11 of the PCG 2019/5 outlines the conditions of the safe harbour compliance approach as follows:

Safe harbour - conditions

11. To qualify for the safe harbour, you must satisfy all of the following conditions:

§  during the first two years after the deceased's death, more than 12 months was spent addressing one or more of the circumstances described in paragraph 12 of this Guideline

§  the dwelling was listed for sale as soon as practically possible after those circumstances were resolved (and the sale was actively managed to completion)

§  the sale completed (settled) within 12 months of the dwelling being listed for sale

§  if any of the circumstances described in paragraph 13 of this Guideline were applicable, they were immaterial to the delay in disposing of your interest, and

§  the longer period for which you would otherwise need the discretion to be exercised is no more than 18 months.

Paragraph 12 of the PCG 2019/5 outlines the circumstances in which the Commissioner may exercise his discretion in extending the two-year period as they may take more than 12 months to resolve:

Circumstances that took more than 12 months to resolve

12. One or more of the following circumstances must have taken more than 12 months to address:

§  the ownership of the dwelling, or the will, is challenged

§  a life tenancy or other equitable interest given in the will delays the disposal of the dwelling

§  the complexity of the 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, or

§  restrictions on real estate activities imposed by a government authority in response to the COVID-19 pandemic.

Paragraph 13 of the PCG 2019/5 outlines the circumstances in which the Commissioner will not exercise his discretion in extending the two-year period as they cannot be material to delays in disposal of the dwelling:

Circumstances that cannot be material to delays in disposal

13. In order to qualify for the safe harbour, none of the following circumstances can have been material to the delay in disposing of your interest:

§  waiting for the property market to pick up before selling the dwelling

§  delay due to refurbishment of the dwelling to improve the sale price

§  inconvenience on the part of the trustee or beneficiary to organise the sale of the dwelling, or

§  unexplained periods of inactivity by the executor in attending to the administration of the estate.

Application to your circumstances

It is determined that the Trustees satisfy the conditions in paragraph 12 to qualify for the safe harbour approach because:

aspects that were material in affecting the timeliness of the Trustees' progress include:

•         a serious medical condition of the spouse of one of the Trustee, which had significant impacts on the lives of the Trustees including their ability to progress the administration of the estate;

•         procedural aspects of the estate management including the time to deal with a Family Arrangement to meet the terms of the Will;

•         dealing with an administrative error by the land titles office in issuing title with a misspelt name and the need to have this rectified;

•         during most of the past years the impacts of COVID-19 have clearly slowed everyone's ability to progress with matters such as dealing with lawyers and real estate agents.

The combination of the above aspects had a significant impact on progress and each of the factors were clearly beyond the control of the Trustees and their combined impact applied for a significant portion of the two-year period. The contract for sale exchanged with no cooling off period and the Property was disposed in 20XX, within 18 months after the two-year period since the passing of the deceased.

While the Trustees qualify for the safe harbour approach in PCG 2019/5, for clarity, the Commissioner will grant the Trustees the discretion to extend the period to dispose of the property under subsection 118-195(1).

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).