Edited version of private advice

Authorisation Number: 1052150812672

Date of advice: 1 August 2023

Ruling

Subject: CGT - deceased estate

Question

Will the Commissioner exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 ('ITAA 1997') and extend the 2-year limit in which the Taxpayers could have disposed of the Deceased's property?

Answer

Yes.

This ruling applies for the following periods

DD MM YYYY to DD MM YYYY

RELEVANT FACTS AND CIRCUMSTANCES

Background information

1.      The Deceased was born on DD MM YYYY and died on DD MM YYYY in XXX aged xx years.

2.      The Deceased's usual place of residence was situated at XYZ ('the Property').

3.      The Deceased left a Will dated DD MM YYYY, appointing her friend the Taxpayer as her Executor.

4.      The Deceased's Will left her entire estate, including residue to the Taxpayer and her friend ZZZ in equal shares as tenants in common.

5.      The Deceased had been a very private and reserved person, largely living a life of seclusion. She had never married, nor had a domestic partner and had no known children.

6.      The Deceased was largely estranged from her own family, other than one brother, NNN, with whom she lived and who passed away not long after she did.

7.      The primary asset subject to this ruling application is the Property, which was the Deceased's main residence at the time of her death and was not then or since, producing any assessable income.

8.      The property is less than 2 hectares in size and remained vacant after the Deceased's death in MM YYYY.

9.      The Deceased acquired the Property by transfer from her brother NNN, with whom she resided at the Property. It is not known when the transfer occurred, but it is believed to have been sometime after YYYY.

Administration of Estate

10.   From YYYY to YYYY, the Taxpayer tried to administer the Deceased's Estate as he had given her his personal assurance that he would do so. However, the Taxpayer unexpectedly also fell ill in YYYY, not long after the Deceased's passing.

11.   The Taxpayer was continuously in and out of medical care from YYYY and especially after he contracted a serious illness in YYYY.

12.   The Taxpayer's spouse died suddenly and unexpectedly on DD MM YYYY which caused a further setback to his already fragile health.

13.   The Taxpayer subsequently passed away on DD MM YYYY in XXX.

14.   Letters of Administration in respect of the Taxpayer's Estate were granted to two of his children ('A & B') on DD MM YYYY.

15.   It was during the process of sorting through the Taxpayer's files that A & B came to realise that probate had not yet been granted over the Deceased's Estate.

16.   As soon as A & B became aware of the state of the Deceased's Estate, they acted to progress its administration and by the end of MM YYYY had engaged solicitors to determine the next steps and progress the administration.

17.   A & B ultimately sought Letters of Administration in respect of the Deceased themselves because from a practical perspective, they seemed to be in possession of the relevant files, and they also wished to honour their father's personal commitment to the Deceased.

After issuance of Grant to the Taxpayers

18.   Letters of Administration in respect of the Deceased were granted on DD MM YYYY to A & B, who then proceeded to search for the missing assets in the Deceased's Estate.

19.   Not much was known to A & B about the Deceased and the difficulty in trying to find information was compounded by the fact that she had passed away so long ago and there were no living close friends or family.

20.   Melbourne's final COVID 19 lockdown between DD MM YYYY and DD MM YYYY complicated A & B's attempts to have the property listed on the market, as there were significant movement restrictions in metropolitan XXX throughout that period.

21.   Nevertheless, once they began administering the Deceased's Estate, they brought the property to market quickly, with a contract of sale dated DD MM YYYY and settlement occurring on DD MM YYYY.

22.   No works, remedial or otherwise were undertaken to the property to improve the sale price, with the property sold as is, in derelict condition, having been vacant since the Deceased's death.

Information provided

23.   You have provided a number of documents containing detailed information in relation to the Taxpayers' private ruling application, including:

•           Private Binding Ruling ('PBR') Application, dated DD MM YYYY

•           Additional Appendices and Certificates

24.   We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Assumption(s)

Not applicable.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 118-195

Further issues for you to consider

Not applicable.

REASONS FOR DECISION

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

SUMMARY

The Commissioner will exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 to allow an extension to the 2-year limit up until the settlement date for the Capital Gains Tax ('CGT') exemption on the sale of the inherited dwelling that was the main residence of the deceased.

DETAILED REASONING

25.   Subsection 118-195(1) of the ITAA 1997 outlines the following with regard to a dwelling acquired from a deceased estate:

(1)    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:

(a)    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

(b)    at least one of the items in column 2 and at least one of the items in column 3 of the table below are satisfied; and

(c)    the deceased was not an excluded foreign resident just before the deceased's death.

Table 1: Beneficiary or trustee of deceased estate acquiring interest

26.   Subsection 118-130(1) of the ITAA 1997 defines ownership interest in a dwelling as having a legal interest of the dwelling until it ends on settlement of the property.

27.   Subsection 118-130(3) of the ITAA 1997 provides that where the sale or other disposal of the dwelling 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, as follows:

(3) For land or a dwelling where you have a contract for the happening of the *CGT event, you have an ownership interest in it until your legal ownership of it ends.

28.   Paragraph 1 of 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", states that section 118-195 ITAA 1997 disregards capital gains and capital losses made from certain CGT events that happen in relation to a dwelling that was a deceased person's main residence and not being used to produce assessable income just before they died, or was acquired by the deceased before 20 September 1985.

29.   Paragraph 2 of PCG 2019 / 5 states that if you disposeof an ownership interest in a dwelling that passed to you as an individual beneficiary or as the trustee of the deceased's estate within two years of the deceased's death, any capital gain or loss you make on the disposal is disregarded. The Commissioner has the discretion to extend the two year period.

30.   Paragraph 3 of PCG 2019 / 5 states that, generally, 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.

31.   Paragraph 12 of PCG 2019 / 5 outlines the circumstances that take more than 12 months to resolve, which will be considered by the Commissioner:

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

•         a life 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, or

•         settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of your control.

32.   Paragraph 15 states that factors that would weigh in favour of the Commissioner allowing a longer period include those listed in paragraph 12 of PCG 2019 / 5 above. The absence of some or all of those favourable factors does not necessarily preclude us from allowing a longer period.

APPLICATION TO YOUR CIRCUMSTANCES

33.   Considering the provisions of subsection 118-195(1) of the ITAA 1997, 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:

a)     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

b)     at least one of the items in column 2 and at least one of the items in column 3 of the table (see previous section) are satisfied; and

c)      the deceased was not an excluded foreign resident just before the deceased's death.

34.   In this matter, the Deceased, acquired the Property by transfer from her brother NNN, with whom she resided at the Property. It is not known when the transfer occurred, but it is believed to have been sometime after YYYY. As per Item 1 in Column 2 as set out in subsection 118-195(1) of the ITAA 1997, 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.

35.   The Deceased passed away on DD MM YYYY.

36.   The Executor of the Deceased's Will, the Taxpayer, passed away on DD MM YYYY following many years of ill health.

37.   Letters of Administration in respect of the Taxpayer's Estate were granted to two of his children, A & B.

38.   Once A & B began administering the Deceased's Estate, they brought the Property to market quickly, with a contract of sale dated DD MM YYYY and settlement occurring on DD MM YYYY.

39.   XXX's COVID 19 lockdowns complicated A & B's attempts to have the property listed on the market, as there were significant movement restrictions in metropolitan XXX throughout that period.

40.   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') outlines how the capital gains tax (CGT) main residence exemption may apply where you dispose of a dwelling that passed to you either as an individual beneficiary or trustee of a deceased estate.

41.   Section 118-195of the ITAA 1997disregards capital gains and capital losses made from certain CGT events that happen in relation to a dwelling that:

•         Was a deceased person's main residence and was not being used to produce assessable income just before they died, or

•         was acquired by the deceased before 20 September 1985.

42.   If you disposeof an ownership interest in a dwelling that passed to you as an individual beneficiary or as the trustee of the deceased's estate within 2 years of the deceased's death, any capital gain or loss you make on the disposal is disregarded. The Commissioner has the discretion to extend the 2-year period.

43.   As per Item 1 in Column 3 as set out in subsection 118-195(1) of the ITAA 1997, the Trustees of the Deceased Estate's ownership interest ends within 2 years of the Deceased's death, or within a longer period allowed by the Commissioner.

44.   Generally, the ATO will allow a longer period where the dwelling could not be sold and settled within 2 years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first 2 years.

45.   As the Property was disposed of more than x years after the date of death of the Deceased, the safe harbour provisions under PCG 2019/5 cannot apply. However, the factors outlined in PCG 2019/5 are indicative of the types of things the Commissioner will take into account in determining whether to exercise his discretion to extend the two year time limit under section 118-195 of the ITAA 1995.

46.   The delay in selling the Property was due to a number of complex factors, which were outside of the control of the Taxpayer, the originally named Executor, or A & B as the substitute Administrators. All relevant parties at all times worked to administer the estate and sell the Property as expeditiously as possible.

47.   The Deceased had led a remarkably isolated and borderline secretive existence, with few known friends other than the Taxpayer, and no surviving family with whom she had maintained a relationship. This presented significant difficulties in identifying the Estate assets and dealing with them. When the Taxpayer fell ill shortly after the Deceased passed away, his unexpected debilitating illness and continued decline meant that, as time passed, the Estate became even more difficult to administer.

48.   On the Taxpayer's passing on DD MM YYYY, A & B acted in concert and brought the property to sale at the earliest opportunity.

49.   All factors considered, the Administrators did everything in their power to progress the estate and dispose of the Property.

50.   Having considered all the relevant facts, the Commissioner will apply the discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit until DD MM YYYY, the date of settlement of the property and the date when the Trustees of the Deceased Estate's ownership interest ends.

CONCLUSION

The Commissioner will exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 to allow an extension to the 2-year limit up until the settlement date (DD MM YYYY) of the property for the Capital Gains Tax ('CGT') exemption on the sale of the inherited dwelling that was the main residence of the Deceased.

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