Edited version of private advice

Authorisation Number: 1052290414576

Date of advice: 13 August 2024

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 ('ITAA 1997') to allow an extension to the 2-year limit to DD MM YYYY for the Capital Gains Tax ('CGT') exemption on the sale of the inherited dwelling that was the main residence of the Deceased?

Answer

Yes.

This ruling applies for the following period

DD MM YYYY to DD MM YYYY

Relevant facts and circumstances

Background information

1.      The Deceased, retired, purchased a house, situated on xxx sqm of land, at XXX ('the Property') in MM YYYY for $xyz.

2.      The Property was the Deceased's principal place of residence until the time of their death on DD MM YYYY.

3.      The Property was never used for the purpose of producing assessable income.

4.      The Deceased executed their Will on DD MM YYYY. The Deceased's Will named their children, AA of XYZ, aged xx years of age, and BB of XYZ, aged xx years of age, as the Executors and Trustees of his Will.

5.      The Deceased bequeathed all of their personal property (the Property at XXX valued at $xyz), including chattels and motor vehicles to their children AA and BB equally. The Will acknowledged that AA and BB have the right to distribute the Property in their discretion amongst themselves and to the Deceased's grandchildren, CC, DD, EE and FF and any of their friends.

6.      The Deceased bequeathed the sum of $xyz to each of their children, AA and BB, to be paid on the first year anniversary of their death. The Deceased further bequeathed the sum of $xyz to each of their grandchildren, CC, DD, EE and FF, to be paid on the first year anniversary of their death.

7.      The residue of the Deceased's estate (life insurance policies, bank accounts and shareholdings totalling $xyz) established a testamentary trust, the ZZZ Testamentary Trust.

8.      Probate of the Deceased's Will was granted by the Supreme Court of XXX on DD MM YYYY to AA.

9.      Following the Deceased's death, the child AA, commenced clearing out the Property, which required the removal of tons of scrap metal, derelict cars, and a lot of household items, including clothing, paint, sump oil, etc. The Deceased was a hoarder, so every cupboard was stuffed with items, and the floor, garden, sheds and carport were full of items, including asbestos, all requiring disposal.

10.   Since the time of the Deceased's death in MM YYYY, AA arranged the funeral, compiled information for probate, applied for a TFN for the testamentary trust and estate, opened bank accounts for the estate. AA also had administrative work as the Executor of the estate, including establishing trust ledgers, preparing the Deceased's final tax return and the collection of financial assets into the estate.

11.   The Deceased's child, AA, was xx years of age when AA commenced clearing out their parent's Property in MM YYYY. AA did not complete clearing out the property until almost x years later, due to a number of issues which prevented him from doing so. In MM YYYY, there was a Covid-19 lockdown in XXX which prevented AA from visiting the Property in XXX. There were a number of prolonged lockdowns in XXX due to Covid-19, and this delayed the clearing out of the property.

12.   In MM YYYY, AA was diagnosed with a cyst on his spine and was unable to walk and required surgery. In MM YYYY, there was another lockdown due to Covid-19. AA was able to work on the Property again in MM YYYY, and was hospitalised again in MM YYYY for further surgery.

13.   In MM YYYY, AA developed further significant health problems which prevented him from working on the Property. We have received documentation which documents AA's health issues.

14.   Once AA had recovered from their surgeries, AA signed with an estate agent to sell the deceased's Property in MM YYYY.

15.   The Property was sold on DD MM YYYY and settlement was on DD MM YYYY.

Information provided

16.   You have provided a number of documents containing detailed information in relation to the Trustee's private ruling application, including:

•           Private Binding Ruling ('PBR') Application, dated DD MM YYYY

•           response to further questions provided DD MM YYYY

17.   We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Assumption(s)

Not applicable.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 118-130(3)

Income Tax Assessment Act 1997 Section 118-195

Further issues for you to consider

Not applicable.

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

Summary

The Commissioner will exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 to allow an extension to the 2-year limit to DD MM YYYY for the Capital Gains Tax ('CGT') exemption on the sale of the inherited dwelling that was the main residence of the Deceased.

Detailed reasoning

18.   Subsection 118-195(1) of the ITAA 1997 outlines the following with regard to a dwelling acquired from a deceased estate:

(1)    A capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if:

(a)    you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

(b)    at least one of the items in column 2 and at least one of the items in column 3 of the table below are satisfied; and

(c)    the deceased was not an excluded foreign resident just before the deceased's death.

Table 1: Beneficiary or trustee of deceased estate acquiring interest:

19.   Subsection 118-130(1) of the ITAA 1997 defines ownership interest in a dwelling as having, relevantly, a legal or equitable interest in the dwelling.

20.   Subsection 118-130(3) of the ITAA 1997 provides that where the sale or other disposal of the dwelling proceeds under a contract, the ownership interest ends at the time of settlement of the contract of sale and not at the time of entering the contract, as follows:

(3) For land or a dwelling where you have a contract for the happening of the *CGT event, you have an ownership interest in it until your legal ownership of it ends.

21.   Paragraph 1 of Practical Compliance Guideline PCG 2019/5 - Capital gains tax and deceased estates - the Commissioner's discretion to extend the 2-year period to dispose of dwellings acquired from a deceased estate, states that section 118-195 ITAA 1997 disregards capital gains and capital losses made from certain CGT events that happen in relation to a dwelling that was a deceased person's main residence and not being used to produce assessable income just before they died, or was acquired by the deceased before 20 September 1985.

22.   Paragraph 2 of PCG 2019/5 states that if you disposeof an ownership interest in a dwelling that passed to you as an individual beneficiary or as the trustee of the deceased's estate within 2 years of the deceased's death, any capital gain or loss you make on the disposal is disregarded. The Commissioner has the discretion to extend the 2-year period.

23.   Paragraph 3 of PCG 2019/5 states that, generally, we will allow a longer period where the dwelling could not be sold and settled within 2 years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first 2 years.

24.   Paragraph 12 of PCG 2019/5 outlines the circumstances that take more than 12 months to resolve, which will be considered by the Commissioner:

•           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 administration of the estate, or

•           settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of your control.

25.   Paragraph 15 states that factors that would weigh in favour of the Commissioner allowing a longer period include those listed in paragraph 12 of PCG 2019/5 above. The absence of some or all of those favourable factors does not necessarily preclude us from allowing a longer period.

Application to your circumstances

26.   Considering the provisions of subsection 118-195(1) of the ITAA 1997, a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if:

a)     you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

b)     at least one of the items in column 2 and at least one of the items in column 3 of the table (see previous section) are satisfied; and

c)      the deceased was not an excluded foreign resident just before the deceased's death.

27.   In this matter, the Deceased acquired the property in MM YYYY for $xyz. As per Item 2 in Column 2 as set out in subsection 118-195(1) of the ITAA 1997, the Deceased acquired the ownership interest before 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.

28.   The Deceased passed away on DD MM YYYY.

29.   Following the Deceased's death, between MM YYYY and MM YYYY when the property was registered for sale, there were a number of prolonged lockdowns due to Covid-19, and AA developed significant health problems which required surgical intervention and hospitalisation. These issues, together with the amount of work that needed to be done to remove the Deceased's possessions from the property before it could be offered from sale, prevented AA from placing the property on the market.

30.   As per Item 1 in Column 3 as set out in subsection 118-195(1) of the ITAA 1997, the Trustee's ownership interest in the Property ends within 2 years of the Deceased's death, or within a longer period allowed by the Commissioner.

31.   Having considered all the relevant facts and the protracted Covid-19 lockdowns in XXX, the Commissioner will apply the discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the 2-year time limit until DD MM YYYY.

Conclusion

The Commissioner will exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 to allow an extension to the 2-year limit to DD MM YYYY for the Capital Gains Tax ('CGT') exemption on the sale of the inherited dwelling that was the main residence of the deceased.

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