Edited version of private advice

Authorisation Number: 1052136324988

Date of advice: 4 July 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise his discretion to extend the 2-year limit on capital gains tax main residence exemption in respect of the principal residence owned by the deceased and sold by the executor?

Answer

No.

This ruling applies for the following period:

20XY

The scheme commenced on:

Date in 20XW

Relevant facts and circumstances

The Deceased died on a Date in 20XW.

At that date the Deceased owned a residential property the Property.

The Property was purchased by the Deceased in Date in 20XV for $amount1.

The Property is less than 2 hectares and was the Deceased's principal residence immediately before their death. The Property was not used for any business purpose.

The Deceased's Will was contested by family members of the Deceased in protracted and costly legal disputes.

Probate was granted by the court to the current executor on a Date 1 in 20XX.

Owing to the complexity of the Deceased's Estate, the executor and the Estate's solicitors set about taking control of and recouping Estate assets, which were subject to ongoing litigation between family members until Date in 20XZ.

It took the executor # months to clean and repaint the Property, and to remove a car which had not been registered for many years. During this time the executor was also working ## hours per week.

The Property was rented out for a short period from Date 2 in 20XX to Date 1 in 20XY. The executor felt that in view of the time being devoted to the ongoing litigation, work and dealing with estate assets that until they had time to organise for it to be sold it could not be left vacant for an indeterminant period.

Apart from this the Property remained empty from the date of the Deceased's death until sold.

The Property was listed with a property agent in Date 2 of 20XY and contracts for sale exchanged on same month. The Property's sale price was $amount2 and settlement took place on Date 3 in 20XY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997).

Question 1

Summary

The Commissioner will not exercise his discretion under subsection 118-195(1) of the ITAA 1997 to extend the two-year period to dispose of the Property for the purpose of disregarding any capital gain or loss on its sale.

Detailed reasoning

As is relevant, subsection 118-195(1) provides that if you own a dwelling in your capacity as trustee of a deceased estate, a capital gain made on the disposal of the dwelling will be disregarded if:

•         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.

Generally, a longer period may be allowed where the dwelling could not be sold and settled within two years of the deceased's death due to reasons beyond the control of the beneficiary or the trustee of the deceased estate that existed for a significant portion of the first two years.

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) outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to extend the two-year period.

Factors that would weigh in favour of us allowing a longer period include those listed in paragraph 12 of PCG 2019/5. The absence of some or all those favourable factors does not necessarily preclude us from allowing a longer period.

Factors that would weigh against us allowing a longer period include those listed in paragraph 13 of PCG 2019/5.

The disputes between family members in relation to the will and consequent delay in the grant of probate until Date in 20XX is a relevant factor as it affected the timing of the sale of the Property.

We note that legal disputes continued up until Date in 20XZ, however the fact that the executor was able to list for sale and sell the Property early in 20XY, indicates that those ongoing disputes did not directly contribute to the delay once probate was granted.

Although it took the executor # months to get the Property in order, the fact that the executor chose to rent out the Property for a short period is relevant in considering the reasons for the further delay in listing the property for sale.

We have considered the fact that the executor was very busy due to various factors and that this contributed to the delay in the sale. In discussing the exercise of the Commissioner's discretion, paragraph 16 of PCG 2019/5 states that 'factors that would weigh against us allowing a longer period include those listed in paragraph 13 of this Guideline'. One of those factors is 'inconvenience on the part of the trustee or beneficiary to organise the sale of the dwelling'.

Having considered the relevant facts and circumstances, the Commissioner will not exercise his discretion under subsection 118-195(1) to extend the two-year period. Consequently, any capital gain or capital loss made on the disposal of the Deceased's property cannot be disregarded.

Additional information

Where we do not exercise our discretion, your capital gain or capital loss will be calculated on the basis that the dwelling was acquired for its market value as at the date of the deceased's death.

Where a full exemption is not available, you may be entitled to a partial exemption under section 118-200.

Section 118-200 provides for a partial exemption where an individual receives an ownership interest in a dwelling or a dwelling as a beneficiary of a deceased estate, or you owned it as the trustee of a deceased estate. A taxpayer may receive a partial exemption if:

(a) they are an individual and their ownership interest in a dwelling pass to them as a beneficiary in a deceased estate, or they owned it as the trustee of a deceased estate, and

(b) section 118-195 does not apply.

You calculate your capital gain or capital loss as follows:

Capital gain or capital loss amount × Non-main residence days ÷ Total days

Capital gain or capital loss is the amount that you made from the disposal of the dwelling (before applying any main residence exemption).

Generally, 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:

1. you, as a beneficiary, if you disposed of the property as a beneficiary
2. a person who was the spouse of the deceased (except if they were permanently separated)
3. 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 (the number of non-main residence days during the deceased's ownership) if either of the following happened:

1. the deceased acquired the property before 20 September 1985
2. the property passed to you after 20 August 1996, and just before the deceased died, the property

o   was the deceased's main residence

o   was not being used to produce income.

Total days is:

If the deceased acquired the property:

1. before 20 September 1985, 'total days' is the number of days from their death until you disposed of the property
2. 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.

Further information can be found by searching 'QC 66055' on ato.gov.au.

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