Edited version of private advice

Authorisation Number: 1052232199432

Date of advice: 15 March 2024

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 dwelling and disregard the capital gain or capital loss you made on the disposal?

Answer

No. The Commissioner will not exercise his discretion under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to the two-year period relating to the disposal of the property. The trustee/beneficiaries of the deceased estate are not exempt from tax on any capital gain made on the disposal of the property pursuant to section 118-195 of the ITAA 1997.

Further information about the Commissioner's discretion can be found by searching ato.gov.au for 'QC 66057'.

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 passed away on XX XXX 19XX.

The dwelling is located at XXXX (the property).

The deceased acquired the property before 20 September 1985. The deceased owned a one third share of the property as tenants in common with Person A and Person B.

The deceased, Person A, and Person B, all resided at the property after it was purchased.

The property was the main residence of the deceased just before they passed away and was not used to produce assessable income at that time.

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

At the time the deceased passed away, they did not have a will. The deceased had multiple beneficiaries, each entitled to a share of their estate. Person A and Person B are two of these beneficiaries, with other beneficiaries (international citizens), living overseas.

The administrator of the estate was appointed in or around the year 19XX.

Person A passed away on XX XXX 20XX, leaving the entire estate to Person B.

Person B passed away on XX XXX 20XX. They had continued to reside in the property from the date it was purchased until they each passed away.

The property was listed for sale on XX XXX 20YY. The property was sold on XX XXX 20XX, with settlement occurring on XX XXX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Section 118-195 of the ITAA 1997 provides that if you own a dwelling in your capacity as the trustee or beneficiary of a deceased estate you can disregard a capital gain or capital loss made from the disposal of a dwelling if:

•         the property was acquired by the deceased before 20 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 within 2 years of the deceased's death.

The Commissioner has discretion to extend the two-year time period where the trustee or beneficiary of a deceased estate's ownership interest ends after two years from the deceased's death. Practical Compliance Guideline PCG 2019/5: Capital gains tax and deceased estates - the Commissioner's discretion to extend the two-year period to dispose of dwelling acquired from a deceased estate outlines the factors that the Commissioner will consider when determining whether to exercise his discretion to extend the two-year period under section 118-195 of the ITAA 1997. This discretion may be exercised in situations such as where:

•         the ownership of a 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 a deceased estate delays the completion of administration of the estate

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

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

These examples are not exhaustive. They provide guidance on what factors the Commissioner would consider reasonable to exercise his discretion to extend the two-year period.

PCG 2019/5 also outlines factors that would weigh against the Commissioner allowing a longer period. Some factors include inconvenience on the part of the trustee or beneficiary to organise the sale of the dwelling or unexplained periods of inactivity by the executor in attending to the administration of the estate.

Whether the Commissioner will exercise his discretion under subsection 118-195(1) of the ITAA 1997 will depend on the facts of each case.

Application to your circumstances

The discretion cannot be applied in this instance as the main noted reason for the delay in disposing of the interest in the property was due to the fact the other two tenants in common were still using the property as their main residence.

Alternative arrangements could have been made to dispose of the property in or around the time you were appointed executors of the estate. For example, a Family Deed of Arrangement could have been arranged to dispose of the property to the other tenants in common, making it payable upon the death of the last survivor.

Given the amount of time between the deceased passed away in 19XX and when it was sold, the discretion cannot be applied.

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