Edited version of private advice

Authorisation Number: 1052249860259

Date of advice: 13 May 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.

Having considered your circumstances and the relevant factors the Commissioner will not allow an extension of time. 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 ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away on DD MM 20YY.

The property is located at XXXX (the property).

The deceased acquired the property after 20 September 1985.

The deceased was not residing at the property at the time they passed away, and the property was being used to produce assessable income at that time.

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

On DD MM 20YY one of the joint Powers of Attorney attempted to sell the property. XXX referred the matter to the relevant administrative authority.

On DD MM 20YY the deceased was moved into respite care. Shortly after, they became a permanent resident of the facility.

Following a hearing held by the administrative authority on DD MM 20YY, a decision was made to appoint the State Public Trustee to manage the affairs of the deceased.

The State Public Trustee organised for the property to be leased. The initial residential tenancy agreement was made on DD MM 20YY for a set time period. After this lease ended, the property continued to be tenanted by the same tenants on a monthly basis. No other formal rental leases were entered into with these tenants.

After the deceased passed away, the State Public Trustee ceased managing the affairs of the deceased.

An application for probate was lodged on DD MM 20YY.

All matters of the estate were managed by an appointed Independent Administrator. The Independent Administrator was appointed following a court decision on.

Probate was granted on DD MM 20YY.

The will of the deceased bequeathed the property to XXX and XXX. Following multiple court appeals and legal disputes between the parties involved (relating to their claim on the estate) between DD MM 20YY and DD MM 20YY, the property was transferred to XXX and XXX on DD MM 20YY.

Following the transfer of the property, the property continued to be rented to the original tenants.

On DD MM 20YY XXX and XXX rendered the services of a real estate agent to sell the property (having not been able to mutually agree on which real estate agency to use between the date the property was transferred until this time).

The contract for the sale of the property was signed on DD MM 20XX.

On DD MM 20YY the tenants, renting the property, were issued with a formal notice to vacate the property. They vacated the property on DD MM 20YY.

The settlement for the sale of the property occurred on DD MM 20YY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

A capital gain or capital loss may be disregarded where a capital gains tax (CGT) event happens to a dwelling if you owned it as the trustee or beneficiary of the deceased estate.

For a dwelling acquired by the deceased after 20 September 1985, that was the deceased's main residence and not used to produce assessable income just before their death, your client will be entitled to a full exemption if their ownership interest ends within two years of the deceased's death. Their ownership interest ends at the time of settlement of the contract of sale.

In your client's case, the deceased acquired the property after 20 September 1985. After the deceased passed away, disputes arose and an independent administrator was appointed to administer the estate. The property was the deceased's main residence until just before they passed away and was used to produce assessable income at that time. It continued to be used to produce assessable income after they passed away by both the estate, and after the property transferred to your client as a beneficiary.

The property sale settled more than two years after the deceased's death. Therefore, your client requires the Commissioner's discretion to extend the two year period to be eligible for an exemption.

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 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 client's control that existed for a significant portion of the first two years.

Paragraph 14 of PCG 2019/5 explains we weigh up all of the factors (both favourable and adverse). Paragraph 17 of PCG 2019/5 provides a list of other factors that may be relevant to the exercise of the Commissioner's discretion which includes the sensitivity of your client's personal circumstances.

In your case, we consider as favourable factors:

•         the legal dispute between XX and the other parties over their claim on the estate;

•         once the property was transferred to your client and XXX, the property was sold in a timely manner.

The property was acquired by the deceased after the introduction of CGT into the Australian tax system on 20 September 1985 and the property was used to produce assessable income before and after the deceased passed away.

The administrative authority managed the estate prior to the deceased's death and decided to rent the property. The property continued to be rented while under the administration of the independent administrator. XXX and XXX had no control over the property being rented during these periods. However, after the property was transferred to the beneficiaries it continued to be rented until the tenants were issued with a formal notice and vacated the property on DD MM 20YY, just prior to settlement on DD MM 20YY.

Based on this, the Commissioner cannot apply the discretion under 118-195(1) 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.

Please note that the first element of the cost base for the property is its market value on the deceased's date of death. Your client is also entitled to the 50% CGT discount in relation to the property.

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