Edited version of private advice

Authorisation Number: 1052128336030

Date of advice: 23 June 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question 1

Will the Commissioner exercise his discretion under section 118-195 of Income Tax Assessment Act (ITAA 1997) to extend the two-year main residence exemption period?

Answer

No.

Question 2

If the full exemption is not available, would Individual B be eligible to claim the main residence exemption for their ownership interest in the property?

Answer

No.

Question 3

In the event the exemption is not available, which estate will be responsible to disclose the realised capital gain?

Answer

Estate of Individual A

This ruling applies for the following period:

1 July 2022 to 30 June 2023

The scheme commenced on:

24 January 2023

Relevant facts and circumstances

Individual A passed away on X October 20XX leaving a will dated XX February 20XX. The will states that other than specified items, the rest and residue of their estate after payment of expenses was bequeathed to their two children, Individual B and Individual C, equally.

The main asset of Individual A's deceased estate was a property situated at xxx (The Property) which was acquired as joint owners with Individual A's spouse on xx/xx/xx.

On xx/xx/xx Individual A became the sole proprietor upon their spouse's death.

Individual A resided in the property as their main residence from date of acquisition until their death.

Individual B also resided at the Property.

On xx/xx/xx Individual C passed away. They had no will and died intestate.

On xx/xx/xx Individual B passed away. Individual B had no will and died intestate. The Trustee was granted probate for Individual B's estate on xx/xx/xx.

The Trustee was engaged by Individual B's child to assist in the administration of their estate and it was through this that they discovered that the Property was still in Individual A's name.

The Trustee applied and was granted probate for Individual A's deceased estate on xx/xx/xx.

The Trustee immediately took possession of the property and commenced its process to put the property on the market and attended the following:

•         x was appointed to clean up the property

•         x was engaged to provide a valuation of the property

•         x was appointed to market and sell the property

•         The property was prepared for sale by public auction on xx/xx/xx

•         Settlement of the property was completed on xx/xx/xx.

At no point was this property available for rent or used for income producing purposes by Individual A or Individual B.

The land size of the property is less than 2 hectares.

No capital improvements have been carried out since the property was acquired by Individual A.

A couple of years after Individual A's death, Individual B was diagnosed with terminal illness and was struggling to lead a normal life due to their illness. Given Individual B's close relationship with their parent, soon after their parent's death, Individual B was grieving and was not in the frame of mind to deal with the transfer of the property. Individual B as executor of Individual A's estate was of the understanding that the administration of Individual A's estate was finalised once the listed assets in their parent's will was distributed to the nominated beneficiaries.

Individual B did not have an ownership interest in any other property and as a beneficiary in their parent's estate they continued to reside in the property until their death.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-130

Income Tax Assessment Act 1997 subsection 118-130 (3)

Income Tax Assessment Act 1997 section 118-195

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

Income Tax Assessment Act 1997 section 118-200

Reasons for decision

Deceased Estate Two-Year Discretion

A capital gain or capital loss may be disregarded under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) where a capital gains tax event happens to a dwelling if it passed to you as an individual and a beneficiary of a deceased estate or you owned it as the trustee of the deceased estate.

For a dwelling acquired by the deceased on or after 20 September 1985, that was the deceased's main residence and not used to produce assessable income just before their death, you will be entitled to a full exemption of your ownership interest ends within two years of the deceased's death. Your ownership interest ends at the time of settlement of the contract of sale.

In this case, Individual A ('the deceased') acquired the Property as joint owners with their late spouse on xx/xx/xx and became the sole proprietor on xx/xx/xx. The Property was the deceased's main residence prior to death, and at that time, was not being used to produce assessable income. Subsection 118-130(3) of the ITAA 1997 provides that where the sale or other disposal of the Property proceeds under a contract, the ownership interest ends at the time of settlement of the contract of sale and not at the time of entering the contract.

The Property sale settled more than two years after their death. You requested the Commissioner to exercise his discretion to extend the two-year main residence exemption.

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 (PCG 2019/5) provides guidance on factors we consider when deciding whether to grant the discretion.

Paragraph 3 of PCG 2019/5 provides that we will allow a longer period where the dwelling could not be sold and settled within two years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first two years.

Paragraph 14 of PCG 219/5 explains we weigh up all of the factors (both favourable and adverse). Paragraph 17 of PCG 20195 provides a list of other factors that may be relevant to the exercise of the Commissioner's discretion which includes the sensitivity of your personal circumstances.

In this case, we consider as favourable factors:

•         the Property was not used for income producing purposes by Individual A or Individual B

•         a couple of years after Individual A's death, Individual B was diagnosed with cancer and was struggling to lead a normal life due to illness

•         given Individual B's close relationship with Individual A, soon after Individual A's death, Individual B was grieving and was not in the frame of mind to deal with the transfer of the property in Individual A's estate

•         Individual B as executor of Individual A's estate was of the understanding that the administration of Individual A's estate was finalised once the listed assets in Individual A's will was distributed to the nominated beneficiaries.

•         Individual B did not have an ownership interest in any other property and as a beneficiary in Individual A's estate he continued to reside in the property until their death.

We also considered:

•         there was no challenge to the ownership of the Property or Individual A's will

•         there were no factors to suggest that Individual A's deceased estate was complex and hence there were no factors to suggest that there would be a delay in completing the administration of Individual A's deceased estate

•         there were no unforeseen or serious personal circumstances arising during the two-year period such that a trustee or beneficiary was unable to attend to Individual A's deceased estate

•         there was no unexpected delay for settlement of a contract of sale over the Property and there were no factors to suggest that the settlement fell through for reasons outside the beneficiary or trustee's control

•         the administrator had a number of responsibilities in winding up the estate of the deceased and one of these was to do with the ownership of the Property. The eventual sale did not occur for more than nine years.

Having considered the relevant facts, we will not apply the discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the two-year time limit.

Partial Exemption

You are entitled to a full main residence exemption on the sale of the property if the conditions in section 118-195 of the ITAA 1997 are satisfied. In this case the conditions as specified in section 118-195 are not satisfied because the interest in the Property has not passed to Individual B as Individual A's estate was never administered.

Subsection 118-200(1) of ITAA 1997 states that if you do not qualify for a full exemption under section 118-195 of ITAA 1997 for an inherited property, you may be entitled to a partial exemption.

Your entitlement to a reduction to your capital gain from the sale of the property is based on the proportion of your total days that are main residence days. In the opposite, the capital gain remains to the extent that your total days are non-main residence days.

Subsection 118-200(2) of ITAA 1997 calculate your capital gain as follows:

Capital gain amount × (Non-main residence days÷Total days)

Non-main residence days is the total of:

1.    the number of days, from when the deceased died until settlement of the sale of the property, that it was not the main residence of one of the following (for the individuals identified in item 2, column 3 of the table in section 118-195 of ITAA 1997):

a.       you, as a beneficiary, if you disposed of the property as a beneficiary

b.       a person who was the spouse of the deceased

c. an individual who had a right to occupy the property under the deceased's will.

2.    The number of days during the deceased's ownership of the property that it was not their main residence.

However, you do not include item 2 (i.e., the number of non-main residence days during the deceased's ownership) if the deceased acquired the property before 20 September 1985.

Total days

If the deceased acquired the property:

•         before 20 September 1985, 'total days' is the number of days from their death until you disposed of the property

•         on or after 20 September 1985, 'total days' is the number of days from when the deceased acquired the property until you disposed of it.

The only individual that has occupied the property as their main residence since Individual A passed away is Individual B. Individual B is not an individual referred to in item 2, column 3 of the table in section 118-195 of the ITAA 1997 because:

•         The property was sold by the Trustee who assisted in the administration of Individual B's estate and not by Individual B as a beneficiary

•         Individual B was the child of Individual A and not a spouse

•         Individual A left a will however the will did not give any individual a right to reside in the property.

The formula in section 118-200 of ITAA 1997 will not be adjusted as per section 118-205 of ITAA 1997 as the ownership interest did not pass to Individual B as a beneficiary of a deceased estate.

Consequently, the number of non-main residence days is equal to the number of total days which means that there is no reduction in the capital gain due to the sale of the property under section 118-200 of the ITAA 1997.

Therefore, Individual B is not entitled to the partial main residence exemption for their ownership interest in the Property.

Realised Capital Gain

The Estate of Individual A still had an ownership interest in the Property and therefore Individual A's estate had a legal interest in the Property. This means that when the Property was sold, the Estate of Individual A's ownership interest continued until the date of settlement (in accordance with section 118-130 of the ITAA 1997) and therefore the Estate of Individual A will be responsible to disclose the realised capital gain. The normal CGT rules will apply to the disposal of the property. You should note that the first element of the cost base is its market value on Individual A's date of death. The Estate of Individual A will also be entitled to the 50% CGT discount in relation to the property.

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