Edited version of private advice

Authorisation Number: 1052412591412

Date of advice: 01 July 2025

Ruling

Subject: Commissioner's discretion - deceased estate

Question 1

Will the Commissioner exercise the discretion under section 118-195 of Income Tax Assessment Act 1997

(ITAA 1997) to allow an extension of time for the trustee to dispose of their ownership interest in the dwelling and disregard the capital gain or capital loss the trustee made on the disposal?

Answer 1

No

Question 2

Is the trustee entitled to a partial main residence exemption on disposal of the Property?

Answer 2

Yes. The trustee is not eligible to disregard the capital gain they made on the sale of the property. However, the trustee is eligible for a partial main residence exemption for the total period the property was the deceased's and their late spouse's main residence.

This ruling applies for the following period:

Year Ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On XXX, the deceased purchased a property (the Property) as a sole owner.

On XXX, the deceased passed away.

Probate was granted to the legal personal representative (LPR) named in the Will, the late relative A.

At the time of the deceased's passing, the deceased, their late spouse and relative B resided in the Property and considered it to be their main residence.

The deceased's Will granted the late spouse a right to reside in the Property for life and after the late spouse's death, the late relative A and relative B to receive the Property equally as tenants‐in‐common.

On XXX, the late spouse passed away. The late spouse resided in the Property until moving into an aged carefacility shortly before passing away. The late spouse did not establish another main residence after moving out of the Property into aged care. The late spouse's trustees chose on the late spouse's behalf to continue to treat the Property as their main residence after moving into aged care.

After the late spouse's death, the late relative A and relative B made decisions regarding the Property as if they had legal ownership in the Property. Both relative B and the late relative A agreed that relative B could continue to reside in the Property rent‐free after the late spouse's death. The title remained in the name of the late relative A as LPR for the deceased's Estate.

Relative B continued to reside in the Property and considered it to be their main residence. Relative B did not own any other property nor treat another property as their main residence.

Relative B and the late relative A were not close and had not kept in touch much since the late spouse's death. Relative B tried numerous times to contact the late relative A via various methods. However, the late relative A didn't respond.

On XXX, the State Trustees was appointed the financial administrator for relative B by an Administrative Tribunal. Shortly after, relative B wanted to sell the Property but could not contact the late relative A for permission as the other owner of the Property.

Relative B incurred and paid the bills associated with the Property including the council rates and utilities. As the Property was in disrepair it was too much for relative B to maintain and relative B wanted to use their 50% share of the proceeds to purchase another property to reside in.

On XXX, the State Trustees sought legal advice as to how the remainder of the estate administration for the deceased's estate could be finalised, given the late relative A was uncontactable.

On XXX, legal advice received from the State Trustees legal department advised to send a letter to the late relative A requesting they complete the administration of the late deceased's estate in accordance with the deceased's Will.

On XXX, the State Trustees sent this letter to the late relative A. However, the late relative A didn't respond.

On XXX, the State Trustees sent a follow up letter to the late relative A for urgent attention. The late relative A didn't respond.

On XXX, the State Trustees engaged the services of an external law firm (the law firm), to lodge a motion to the Supreme Court. The law firm requested the late relative A either complete the estate administration or renounce as Executor of the deceased's estate.

On XXX, the State Trustees received advice from the law firm that they would attempt to contact the late relative A one final time and seek their cooperation in the sale of the Property before proceeding to the courts. The law firm provided the late relative A with 7 days to respond with confirmation that they would cooperate in the sale of the Property. Should the late relative A not respond, they would commence proceedings to have the late relative A removed as Executor of the deceased's estate.

The law firm placed this letter on hold until XXX due to advice that the late relative A was of ill health and in hospital.

On XXX, after receiving the letter from the law firm, the late relative A met with the law firm and agreed to sell the Property.

On XXX, the Property sold at auction and settlement occurred on XXX.

On XXX, relative B moved out of the Property.

The Property was the last remaining asset of the deceased's estate, with all other tasks finalising the estate's administration already being completed by the late relative A after the deceased's death. Relative B received their 50% share of the Property sale proceeds.

On XXX, the late relative A passed away.

On XXX, the Supreme Court proved the late relative A's Will and granted Probate to the State Trustees.

On XXX, the State Trustees made full and final distribution from the late relative A's estate to relative B, the sole beneficiary.

Relative B advised the State Trustees the late relative A's share of proceeds from the sale of the Property was not accounted for.

The State Trustees audited the late relative A's bank accounts but could not locate their share of the proceeds. The State Trustees contacted the conveyancer who assisted with the sale, and they provided the Property sale documents including, the settlement statement and cheque details issued to the late relative A for their 50% share from the sale.

On XXX the bank advised the State Trustees the late relative A had not banked the cheque and agreed to issue a replacement cheque to the late relative A's estate.

On XXX, the funds were received into the late relative A's estate.

The late relative A did not reside in the Property.

The Property was less than 2 hectares in size.

The Property was not income‐producing or available for rent at any time throughout the deceased's lifetime or during the estate administration.

Relative B did not pay any rent to the late relative A or the deceased's estate during the time Relative B resided in the Property.

No capital improvements had been undertaken on the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subdivision 115-A

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-200

Income Tax Assessment Act 1997 section 128-15

Reasons for decision

IssueCapital Gains Tax - Deceased Estate

Question 1

Will the Commissioner exercise the discretion under section 118-195 of ITAA 1997 to allow an extension of time for the trustee to dispose of their ownership interest in the dwelling and disregard the capital gain or capital loss the trustee made on the disposal?

Answer

No

Question 2

Is the trustee entitled to a partial main residence exemption on disposal of the Property?

Answer

Yes. The trustee is not eligible to disregard the capital gain they made on the sale of the property. However, the trustee is eligible for a partial main residence exemption for the total period the property was the deceased's and the deceased's late spouse's main residence.

Detailed reasoning

Section 118-195 of the ITAA 1997 provides that a main residence exemption will apply to beneficiaries or trustees of deceased estates when certain conditions are met.

Subsection 118-195(1) of the ITAA 1997 provides that a capital gain or loss may be disregarded where a capital gains tax event occurs disposing of a dwelling passed to a beneficiary of a deceased estate within 2 years of the deceased's date of death, or, from the deceased's death until sale, the dwelling was the main residence of:

•                     the spouse of the deceased immediately before the death; or

•                     an individual who had a right to occupy the dwelling under the deceased's Will; or

•                     the individual to whom the ownership interest is transferred as a beneficiary and is then sold by that individual.

Paragraph 118-195(1)(b) of the ITAA 1997 allows the Commissioner discretion to extend the 2 year period to sell a dwelling from a deceased estate. However, we only grant an extension if there is a delay outside the control of the trustees of the estate that existed for a significant portion of the first 2 years.

Subsection 118-200(1) of ITAA 1997 states that if you do not qualify for a full exemption under section 118-195 of the ITAA 1997, you may be entitled to a partial exemption.

Application to your circumstances

In this case, the trustee doesn't meet the conditions for the Commissioner to exercise the discretion given under subsection 118-195(1) of the ITAA 1997.

Although we understand why the trustee allowed relative B to continue living at the property, relative B did not have a right to occupy under the deceased's Will. The trustee's decision to allow relative B to reside in the dwelling was a matter of choice within the control of the trustee (the late relative A).

In this case, the trustee's ownership interest in the Property ended more than 2 years after the deceased's death. Further, the sale of the property was not completed until 10 years after the deceased's spouse, the late spouse (who also had a right to reside under the Will) passed.

Although the trustee doesn't satisfy the conditions for a full main residence exemption, they are entitled to a partial exemption under subsection 118-200(2) of the ITAA 1997. The terms of the deceased's Will provided the late spouse a right to occupy the Property for their life. Therefore, the main residence exemption will include the period from the date of the deceased's death, XXX to the date of the deceased's spouse's death on XXX, and the deceased's ownership period.

Further, relative B's occupation of the property does not count towards the main residence exemption because it did not occur under the deceased's will. For more information refer to ATO Interpretative Decision ATO ID 2003/109 Capital gains tax: Deceased estate - main residence exemption.

The first element of the trustee's cost base for the property is its market value on the deceased's date of death. The trustee is also entitled to the 50% discount on their capital gain under subdivision 115-A of the ITAA 1997 as the deceased owned the property for at least 12 months.

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