Edited version of private advice

Authorisation Number: 1052131312568

Date of advice: 5 July 2023

Ruling

Subject:CGT - deceased estate

Question

Will the Commissioner exercise the discretion under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension of time for the Estate to dispose of its ownership interest in the Property and disregard the capital gain or capital loss made on the disposal?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Deceased passed away on DD MM 20XX.

As at the date of death:

1.    The Deceased owned the Property which had been acquired prior to 20 September 1985 and was less than 2 hectares in size.

2.    Person A was residing at the Property.

3.    The Deceased resided in aged care and had done so since 20XX. Prior to moving into aged care, the Deceased moved into Person A's home to enable the property to be renovated. At that time, Person A moved into the Property.

4.    Renovations were completed at the Property prior to the Deceased passing.

5.    The Deceased's Will listed 3 beneficiaries (the Beneficiaries): Person A, Person B, and Person C. The Will provided the Estate was to be distributed between the Beneficiaries in equal shares.

6.    The Will did not grant a life interest in the Property to any of the Beneficiaries.

Following the Deceased 's date of death, Person A, their spouse, and at times their family members, continued to reside at the Property.

On DD MM 20XX, probate was granted.

Person B was appointed executor (The Executor). The Executor lived approximately X km distance from the Property. The Executor had health concerns and caring responsibilities which impacted on their ability to attend the Property

Initial discussions held between the Beneficiaries focussed on Person A's wish to retain the property. This plan did not eventuate.

The Beneficiaries discussed committing funds towards works on the Property. This did not eventuate.

Person A continued to reside at the Property. The Executor entrusted that Person A would carry out works on the Property such as gardening work, general clean up and repairs. These works were not completed.

From March 2020 Covid restrictions made it difficult for the Executor to attend the Property.

On DD MM 2020, solicitors for the Estate wrote to Person A instructing them to cease works on the Property and vacate by DD MM 20XX. As Person A did not vacate the Property by DD MM 20XX, solicitors for the Estate again wrote to Person A instructing them to vacate the Property by DD MM 20XX.

After Person A vacated the Property, necessary works were undertaken to get the property in a state ready to be listed for sale. These works included: the removal of personal effects and other items, fixing a leaking roof, and tidying up of the house and garden. Ongoing Covid restrictions impacted the Executor's ability to attend the Property and to engage tradespeople.

The Property was sold by contract dated DD MM 20XX with settlement occurring on DD MM 20XX

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

A capital gain or capital loss may be disregarded where a capital gains tax event happens to a dwelling if you owned it as the trustee or beneficiary of the deceased estate.

For a dwelling acquired by the deceased before 19 September 1985, or a dwelling that was the deceased's main residence just before their death and not used by them to produce income at that time, the estate will be entitled to a full exemption if their ownership interest ends within two years of the deceased's death. The ownership interest ends at time of settlement of the contract of sale.

In your case, the Deceased acquired the property before 19 September 1985. The Property sale settled more than X years after the Deceased's death. Therefore, you require the Commissioner's discretion to extend the two-year period to be eligible for the 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 provides guidance on factors we consider when deciding whether to grant the discretion.

Paragraph 3 of PCG 2019/5 provides that generally we will allow a longer period where the delay in the sale of the dwelling was due to reasons beyond your control that existed for a significant portion of the first 2 years.

Paragraph 12 of PCG 2019/5 outlines favourable factors, these are circumstances that took more than 12 months to resolve and therefore were impediment(s) to the disposal of the property.

Paragraph 13 of PCG 2019/5 outlines factors that cannot be material to delays in the disposal of the property

Paragraph 14 of PCG 2019/5 explains we weigh up all of the factors (both favourable and adverse).

Paragraph 17 of PCG 2019/5 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 your case we considered these relevant factors, Person A continued to reside at the Property until MM 20XX. They were not instructed to vacate the Property until MM 20XX being approximately X years after the Deceased passed away. We acknowledge Covid restrictions were in place from March 2020 in State, which restricted the Executor's ability to physically attend the Property. However, Covid was not a factor that existed within the 2-year period from the Deceased's date of death. Given the Property had been renovated prior to the Deceased's death, we consider the Property could have been sold in its current state within the 2-year period from the Deceased's date of death.

You have stated that the Executor sought to administer the Estate efficiently and to also maintain the peace of the family. Further, that Person A wanted to essentially take charge of the Estate despite not being formally appointed. We have not been provided with any information which suggests there was a challenge to the appointment of the Executor for this Estate. We acknowledge the sensitivity of the Executor's personal circumstances, including their own health and caring responsibilities. However, the decision to allow Person A to continue residing at the Property was a matter of choice within the control of the Executor. We do not accept that there were circumstances that were beyond their control that existed for a significant portion of the first 2 years following the Deceased's death which delayed the sale of the Property.

The information provided in your application does not provide that the delay in selling the Property was caused by any of the circumstances described as favourable factors as outlined in paragraph 12 of PCG 2019/5 for example, legal challenges to the ownership of the dwelling or challenges to the Will.

Paragraph 13 of PCG 2019/5, outlines factors that cannot be material to delays in the disposal of the property including inconvenience on the part of the trustee or beneficiary to organise the sale is not considered material to the delay in disposing of the dwelling. We consider allowing Person A to continue to reside in the property for approximately X years before they were instructed to vacate the Property indicates that some of the delay was caused by inconvenience on behalf of the Executor in organising the sale of the Property. We also consider it relevant that tasks to prepare the Property for sale were not undertaken until more than X years after the Deceased's date of death.

We therefore consider the decision to allow Person A to continue residing at the Property was a matter of choice within the Executor's control. The subsequent delay in the disposal of the dwelling was caused by the actions and choices of the Executor of the Estate.

In applying the legislation to your circumstances, there is no specific qualifying event or situation that occurred, outside of the control of the Executor, causing a delay in the sale of the Property.

PCG 2019/5 provides an example similar to your situation where an individual was allowed to reside in the deceased dwelling after their death but did not sell the dwelling within the 2-year period.

Example 2 - No Safe Harbour - Family Member Residing in Dwelling

Ms Evans lived with Bevan (her adult son and full-time carer) in her main residence until she died on 1 September 2013. The dwelling was acquired after 20 September 1985 and was not being used to produce assessable income. On the basis the dwelling would still be sold and settled within a two-year period, the trustee of the estate allowed Bevan to continue to live in the dwelling until he found full-time employment. Bevan was not given any right to occupy the house under Ms Evans' will. In June 2016, Bevan obtained full-time employment and moved out of the dwelling. The trustee then sold the dwelling. Because the delay in selling the dwelling was not caused by any of the circumstances described as favourable factors, the trustee cannot rely on the safe harbour. The decision to allow Bevan to reside in the dwelling was a matter of choice within the control of the trustee.

Therefore, applying the guidelines set out in PCG 2019/5, the Commissioner will not exercise the discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the two-year time limit as the delay in disposing of the Property was not outside of the control of the beneficiaries.

This means the Estate will be liable for tax on the capital gain made on the disposal of the Property from the date of the Deceased's passing. That is, the first element of the cost base of the Property will be its market value at the date of death. The Estate will be entitled to the 50% CGT discount 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).