Edited version of private advice

Authorisation Number: 1052160961513

Date of advice: 30 August 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question

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

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away on XX/XX/20XX.

The dwelling is located at XXXX (the property).

The property was the main residence of the deceased until XX/XX20XX when they moved into an aged care facility.

The property was not used to produce assessable income.

The property was situated on less than two hectares of land.

Initial probate was granted on XX/XX/20XX.

Following the initial grant of probate, the title transferred to the executors on XX/XX/20XX via the XXXX application.

After the deceased's death, a person resided at the property for a time pursuant to the terms of the deceased's will.

On XX/XX/20XX, an agreement was reached with the executors where the rights which permitted the person to reside at the property were renounced.

On XX/XX20XX, the family of the deceased entered into a Deed of Family Arrangement to formalise the future disposal and distribution of the balance of the proceeds of the sale of the property.

From XX/20XX to XX/20XX, the executors engaged a contractor to undertake work on the property.

One of the co-executors was not forthcoming or proactive in their role as executor. Their signature was required on documentation, but they were elusive and unavailable. They avoided their executorship duties for approximately two years.

On XX/XX20XX, the other co-executor made an application to the Supreme Court to be the sole executor and on XX/XX20XX, they became the sole registered proprietor on the property title as executor of the will.

Settlement occurred on XX/XX/20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

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 after 19 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 if 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.

If your ownership interest ends outside of the two-year period, a full exemption may still be available if the dwelling was from the date the deceased's death until your ownership period ends, the main residence of one or more of the following individuals:

•         the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased)

•         an individual who had a right to occupy the dwelling under the deceased's will, or

•         an individual beneficiary to whom the ownership interest passed, and the CGT event was brought about by that person.

In your case, the deceased acquired the property after 19 September 1985. The property was the deceased's main residence until they moved into a nursing home. The property was not used to produce assessable income just before their death. The property can be treated as the main residence of the deceased at the date of death due to the application of the absence rule under section 118-145 of the ITAA 1997.

It is noted that a person resided at the property for a time pursuant to rights provided under the deceased's will However, a few years after the deceased's passing, an agreement was reached with the executors in which these rights were renounced and several more years passed before the property was disposed of.

The property sale settled more than two years after the deceased's death. Therefore, you require the Commissioner's discretion to extend the two-year period to be eligible for an exemption under section 118-195 of the ITAA 1997.

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 outlines the factors that the Commissioner will consider when determining whether or not to exercise the discretion to extend the two-year period under section 118-195 of the ITAA 1997.

Paragraph 3 of PCG 2019/5 provides that the Commissioner will allow a longer period where the sale of the dwelling could not be settled within two years of the deceased's death due to reasons beyond your control.

Paragraph 14 of PCG 2019/5 explains that we weigh up all the factors both in favour and against the granting of the Commissioner's discretion.

In your case, the dwelling was settled more than two years after the deceased's death. There was an initial period of delay due to the rights of use of the property provided under the will. This was out of your control. However, this impediment was removed when these rights were renounced. Yet, it took several more years before the property was disposed of.

We acknowledge that there was some further delay due to the co-executor avoiding their executorship duties. However, it is noted that it took a substantial period of time before you applied to become the sole executor. If the co-executor was significantly impeding the disposal of the property, it was open to you to take more timely action to have them removed as co-executor.

A significant reason for the further delay was the work done to the property. You claimed that the work was required before the property could be sold. However, it is our understanding that a property could be sold 'as is', as long as any issues or defects with the property were disclosed to prospective buyers. Therefore, we asked you to provide evidence that it was legally required for the work to be done before the property could be sold. You provided more details of the work that was completed but no evidence that you were not permitted to sell the property without the work being done.

We can understand that you and the beneficiaries wished to achieve a higher sale price by having the work done to the property. However, no evidence has been provided to indicate it was mandatory for the work to be completed before it could be sold. Although it was an understandable choice to undertake the work, nevertheless it was still a choice rather than a matter that was out of your control.

PCG 2019/5 states that delays due to trying to achieve a higher sale price, such as waiting for the market to improve or refurbishing the property, would weigh against the exercise of the discretion.

We have considered all your circumstances and as there was a significant period of delay that was not outside of your control, the Commissioner will not exercise the discretion under section 118-195 of the ITAA 1997 to allow an extension of time.

Therefore, any capital gain made on the property from the date the deceased passed away until the property was disposed of will be subject to tax. That is, the first element of your cost base for the property is its market value on the deceased's date of death. The cost of work done can also be included in the cost base of the property. You are also entitled to the 50% CGT discount in relation to the property. In addition, you may be entitled to a partial exemption under section 118-200 of the ITAA 1997. Refer to that provision for details.

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