Edited version of private advice

Authorisation Number: 1052314904599

Date of advice: 9 October 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.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away on DD MM 19YY.

The property is located at XXXX (the property).

The deceased acquired the property before 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 will of the deceased contained terms that the property was to be held on trust with the income generated from the property to be paid to another individual (Person B) until their death.

Person B passed away on DD MM 20YY. Shortly thereafter the state Public Trustee were appointed administrator of the estate.

One of the beneficiaries of the estate Person C, could not be immediately located. At this time, the two beneficiaries of the estate - Person C and Person D were asked for their instructions regarding the disposal of the property.

Appointing a real estate agent to list the property for sale was delayed due to the instructions of the beneficiaries not being immediately provided, and subsequent disagreements surrounding the finer points of the disposal of the property.

On DD MM 20YY an agent was appointed, and the property was listed for sale.

On DD MM 20YY the first sale contract was signed. On DD MM 20YY the first sale contract was terminated by the purchaser.

On DD MM 20YY the second sale contract was signed with a new purchaser. On DD MM 20YY the second purchaser requested an extension due to finance related delays. On DD MM 20YY the second contract was terminated by the purchaser due to an inability to obtain financing.

On DD MM 20YY the third sale contact was signed. The property sale was settled 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 before 20 September 1985, you will be entitled to a full exemption if 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.

In your case, the deceased acquired the property before 20 September 1985. After the deceased passed away, the property was held in trust with the assessable income the property was earning was provided to a nominated individual (in line with the will of the deceased). After the nominated individual passed away, the sale of the property was further delayed due to a disagreement between the two beneficiaries and then difficulty in locating a purchaser.

The property sale settled more than two years after the deceased's death. Therefore, you require 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 will of the deceased left the property in trust to a nominated individual.

•                     The difficulty in locating Rest and Residue beneficiaries of the estate.

•                     Once an agent was selected, the property was placed on the market in a timely manner - and the further delay was caused by multiple purchasers withdrawing from purchasing the property.

In your case, we consider as unfavourable factors:

•                     Delay in obtaining instructions on the disposal of the property.

•                     The disagreement between the beneficiaries.

The property was acquired by the deceased before the introduction of Capital Gains Tax into the Australian tax system on 20 September 1985 and the property was used to produce assessable income after the deceased passed away, up until the date the property was sold.

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. You will also be entitled to the 50% CGT discount in relation to the property.

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