Edited version of private advice

Authorisation Number: 1052171016836

Date of advice: 20 September 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 (ITAA 1997) to allow an extension of time for you to dispose of your ownership interest in the property and disregard the capital gain or capital loss you 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 purchased the property with their spouse pre-CGT as joint tenants.

The property is less than two hectares.

The deceased's spouse passed away post-CGT and their fifty percent ownership interest passed to the deceased under a right of survivorship.

The deceased moved to a nursing home in XX 20XX and passed away on XX XX 20XX.

The property was rented from XX 20XX to XX XX 20XX.

The executor will make a choice to continue to treat the dwelling as the deceased's main residence under section 118-145 of the ITAA 1997 for the period from when the deceased moved to a nursing home until their death.

Probate was granted in XX 20XX.

The deceased's will gave the property to the beneficiary (you), on trust until you attained the age of 21 years.

You were a minor at the date of the deceased's death and turned 18 years of age on XX XX 20XX.

After you turned 18, the executor/trustee consulted with you regarding your intentions for the property and was advised that you wished to obtain title to the property and sell it now that you were an adult even though it was earlier than the age set out in the deceased's will. You wanted to purchase another property in a location of your preference.

Although the will provided that you attain the age of 21, the executor/trustee agreed that it was appropriate to transfer the property to you now that you were an adult so that you could then sell it.

The property has a swimming pool, and arrangements were made to have the pool fence inspected and a compliance certificate obtained prior to sale of the property. The process of obtaining the initial inspection, organising and obtaining tradespeople to complete works to make the pool fence compliant and organising the final inspection and obtaining the compliance certificate took 12 months which included delays due to COVID-19.

The property was tenanted and a three month notice period was required to vacate the property. The property was vacant from XX XX 20XX.

The executor/trustee transferred the property to you as the beneficiary in XX 20XX.

A contract of sale was entered into by you on XX XX 20XX and settlement occurred on XX XX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Section 118-195 of the ITAA 1997 provides a capital gains tax (CGT) exemption to beneficiaries and trustees where a CGT event happened to a dwelling they acquired from a deceased estate if:

•         the property was acquired by the deceased before September 1985, or

•         the property was acquired by the deceased 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 with two years of the deceased's death or within a longer period allowed by the Commissioner, or

•         the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of:

o   the spouse of the deceased immediately be death, or

o   an individual who had a right to occupy the dwelling under the deceased's Will; or

o   the individual to whom the ownership interest is transferred as a beneficiary and is then sold by that individual.

As you did not dispose of your ownership interest within two years of the deceased's passing, you do not satisfy the conditions to be eligible for an exemption under section 118-195 of the ITAA 1997 unless the Commissioner's discretion to extend the two-year period is exercised.

Commissioner's discretion

Practical Compliance Guideline PCG 2019/5: 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 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.

Generally, the Commissioner will allow a longer period where the sale of the dwelling was delayed due to reasons beyond your control.

According to the PCG, factors that would weigh in favour of the Commissioner allowing a longer period include:

•         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 the administration of the estate

•         settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of the trustee's/beneficiary's control

•         restrictions on real estate activities imposed by a government authority in response to the COVID-19 pandemic.

Other factors that may be relevant to the exercise of the Commissioner's discretion include, but are not limited to:

•         the sensitivity of the trustee's/beneficiary's personal circumstances and/or of other surviving relatives of the deceased

•         the degree of difficulty locating all beneficiaries required to prove the Will

•         any period the dwelling was used to produce assessable income, and

•         the length of time the trustee/beneficiary held ownership interest in the dwelling.

Factors that would weigh against the Commissioner allowing a longer period include:

•         waiting for the property market to pick up before selling the dwelling

•         delay due to refurbishment of the house to improve the sale price

•         inconvenience on the part of the trustee or beneficiary to organise the sale of the house, or

•         unexplained periods of inactivity by the executor in attending to the administration of the estate.

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

In your case, we acknowledge the deceased's will specifies that the property was to be held on trust until you achieved 21 years of age. However, it was still possible to transfer the property to you before this as you only had to be of legal adult age and this is shown by the fact that the property was actually transferred to you before you turned 21. Therefore, this clause of the will was not an impediment to the disposal of the property once you turned 18.

After you turned 18 and the decision was made to sell the property, there was a significant delay due to work undertaken to the pool fence so that a pool compliance certificate could be obtained. A certificate of compliance for a pool is not required under the relevant State legislation in order to sell a property. Instead, a certificate of non-compliance could have been provided and the responsibility to obtain pool certification transferred to the purchaser. Although it was understandable why the choice was made to undertake the compliance works and obtain the certificate of compliance before selling, it was not compulsory to do so. It was still a choice so not a matter that was out of the control of you and the executor/trustee. The fact that this period of delay was due to a choice rather than a matter that was out of the control of you and the executor/trustee is an unfavourable factor to consider.

The dwelling was rented out for the majority of the period after the deceased passed away. The fact that the dwelling was used to produce assessable income for a substantial period from the date of death and beyond the time that you obtained legal adult age is a factor unfavourable to the granting of the discretion.

The absence rule only has effect for the period before the deceased passed away. For the period from the deceased's date of death, before the property was rented out it was not the main residence of the deceased's spouse, a person with a right to occupy under the will, or yourself as the beneficiary who sold the property. Consequently, the absence rule is not relevant for this period.

There was no challenge to the ownership of the property or the deceased's will. There were no unforeseen or serious personal circumstances arising such that a trustee or beneficiary was unable to attend to the estate's administration. There was no unexpected delay for settlement of a contract of sale over the property.

Having considered the relevant facts, the Commissioner will not apply the discretion under section 118-195 of the ITAA 1997 to allow an extension to the two-year time limit. Therefore, the normal CGT rules will apply to the disposal of the property. You should note that 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 to the property after the deceased's passing can also be included in the cost base of the property if the cost of the work done is not deductible. You are also 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).