Edited version of private advice

Authorisation Number: 1052191769981

Date of advice: 22 November 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question 1

Will the Commissioner exercise his discretion under section 118-195 of 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 capital loss you made on the disposal?

Answer

No.

Question 2

Are you entitled to an exemption in relation to the sale of the property due to Executor 1 using it as their main residence?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

The property was purchased a few decades ago by the deceased and their spouse.

The property is under 2 hectares in size.

Land registry services were notified of the spouse's death a number of years ago.

The property was the main residence of the deceased from the time of purchase until their date of death.

He passed away several years ago.

The executors of the Estate are Executor 1 and Executor 2.

The Will gave the right to buy to a third party, however this right was not exercised and they did not reside in the property at any time after the date of death having already moved out of the property in prior year.

Executor 1 had moved into the property a few years earlier to act as the deceased's carer and continued to reside in the property after the date of death up until the day before settlement.

There was a delay in obtaining probate while the executors came to an agreement about what they were going to do with the deceased's ashes.

Executor 2 sought legal advice approximately a year after the deceased had passed away.

Probate of the Will was granted early in the following year.

Following probate being granted, Executor 1 expressed a desire to purchase the dwelling.

Several months later, there was a fire on Executor 2's property which killed a number of pets as well as destroyed a substantial portion of the house.

Executor 2 was renting the property with their spouse and the landlord refused to make an insurance claim, so Executor 2 and their partner were left with a significant clean-up effort.

Later in the same year, the area where Executor 2 lived suffered bush fires.

Executor 2 sought legal advice in the following year.

Due to issues with their landlord Executor 2 moved to a different rental property a few months later.

No further action occurred during most of the same year due to not being able to afford legal services, their partner losing their job, and their child being stood down.

The estate's lawyer threatened to cease acting as their solicitor due to no action being taken to attend to their duties as executors. Executor 2 asked for an extension till the end of the year.

Executor 1 lodged a loan application and engaged a solicitor to prepare to purchase the property, however, ultimately Executor 2 did not go ahead with the financing.

In a later year, Executor 2's child fell ill with a significant condition requiring surgery.

Several months later Executor 1 advised that they didn't want to buy the property.

The executors agreed to the sale of the property.

A few months later, Executor 2 sustained an injury which required several weeks to recover.

The dwelling was sold at the end of the year, with settlement occurring a couple of months later.

The property was not used to produce income between the date of death and the sale date.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Question 1

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 on or after 20 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 of 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.

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) provides guidance on factors we consider when deciding whether to grant the discretion.

Paragraph 3 of PCG 2019/5 provides that 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.

Paragraph 14 of PCG 219/5 explains we weigh up all of the factors (both favourable and adverse). Paragraph 17 of PCG 20195 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 this case, we consider as favourable factors:

•         the Property was not used for income producing purposes

•         the executors were required under the terms of the Will to offer the purchase of the property to the third party as the Will gave them a right to purchase

•         several years after the deceased passed away one of the executors had short term health issues

•         The rental property where Executor 2 was residing was partially destroyed by a house fire and later the same year, the house was threatened by bushfires.

We also considered:

•         there was no challenge to the ownership of the Property or the deceased's Will

•         there were no factors to suggest that the deceased's estate was complex and hence there were no factors to suggest that there would be a delay in completing the administration of the estate

•         there were no unforeseen or serious personal circumstances arising during the two-year period such that a trustee or beneficiary was unable to attend to the deceased's estate

•         there was no unexpected delay for settlement of a contract of sale over the Property and there were no factors to suggest that the settlement fell through for reasons outside the beneficiary or trustee's control

•         the administrator had a number of responsibilities in winding up the estate of the deceased and one of these was to do with the ownership of the Property. The eventual sale did not occur for several years.

Having considered the relevant facts, we will not apply the discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the two-year time limit.

In considering whether to extend the two-year period all the factors both in favour and against the granting of the Commissioner's discretion must be considered.

In this case it is noted that the period of time from the date of death of the deceased to the date of grant of probate to have exceeded several years. In this regard, we consider that the executor has not provided adequate explanation for periods of inactivity in attending to the administration of the estate and as such is a mitigating factor against the granting of the discretion.

Conclusion

It is clear that the Commissioner's discretion is meant to be limited to situations where the owner is effectively prevented from selling the property. The intention of the two-year period is to allow the orderly and timely sale of deceased estate property.

Based on the information and documentation provided with this private ruling it has been determined that the Commissioner's discretion will not be exercised to extend the two-year period as there was a significant period of delay in disposing of the property that was not outside of the control of the executor.

Question 2

You are entitled to a full main residence exemption on the sale of the property if the conditions in section 118-195 of the ITAA 1997 are satisfied. These conditions are not satisfied because it was not the main residence of a relevant individual from the date that the deceased passed away until your ownership period ended.

The individuals identified in item 2, column 3 of the table in section 118-195 of the ITAA 1997 are:

•         the spouse of the deceased

•         an individual with a right to occupy the dwelling under the will of the deceased, and

•         if the property is sold by an individual to whom the ownership interest passed as a beneficiary - that individual.

The only individual that has occupied the property as their main residence since the deceased passed away is Executor 1. In this case Executor 1 is not an individual referred to in item 2, column 3 of the table in section 118-195 of the ITAA 1997 because:

•         Executor 1 was not the deceased's spouse

•         the will did not give Executor 1 a right to reside in the property, and

•         the property had not passed to Executor 1 as a beneficiary.

Consequently, you do not satisfy the conditions to be eligible for a main residence exemption under section 118-195 of the ITAA 199 and the capital gain cannot be disregarded.

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).