Edited version of private advice

Authorisation Number: 1051854600240

Date of advice: 24 June 2021

Ruling

Subject: CGT - deceased estate

Question

Will the Commissioner allow an extension of time for you to dispose of your ownership interest in the dwelling and disregard any capital gain or loss you made on the disposal?

Answer

No.

This ruling applies for the following period:

Year ending 30 June YYYY

The scheme commences on:

DD/MM/YYYY

Relevant facts and circumstances

The deceased passed away on DD/MM/YYYY.

The deceased acquired the dwelling post capital gains tax.

The dwelling was the deceased's main residence for the whole ownership period.

The deceased did not use the property to produce income during their ownership period.

After the deceased's death, you being the executor spent several months locating the deceased's will.

Probate was granted XX months after the deceased's date of death.

A handyman commenced preparing the dwelling for sale X months after probate was granted.

At the time of the deceased's death, water was leaking from the bathroom and into the toilet room and garden of the dwelling.

After the deceased's death, the gas stopped working in the dwelling.

The following works were completed on the dwelling, prior to the dwelling being listed for sale (the works):

•         The bathroom was waterproofed

•         New bathroom fittings were installed

•         The toilet was replaced

•         The laundry and three rooms were tiled and painted

•         The dwelling was painted both inside and outside, including the walls, ceiling, doors, cupboards and window frames

•         A new stove top was installed in the kitchen

•         The garage door was mended

•         A partial fence was erected, and

•         Brickwork was completed.

You did not attempt to sell the dwelling without having the works carried out.

The works were initially estimated to be completed on the dwelling within XX months of the deceased's death.

The handyman engaged to complete the works was unlicensed. Therefore, during COVID-19 lockdowns, the handyman could not access the dwelling for XXX days due to their inability to obtain the required permit.

The works were completed two years and five months after the deceased's date of death.

Settlement occurred two years and eight months after the deceased's date of death.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 subsection 118-195(1)

Income Tax Assessment Act 1997 section 118-200

Reasons for decision

Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a capital gains tax (CGT) exemption to beneficiaries and trustees where a CGT event happened to a dwelling they acquired from a deceased estate. Subsection 118-195(1) of the ITAA 1997 provides that a capital gain or loss in this circumstance will be disregarded if:

1.    the deceased acquired their ownership interest in the dwelling on or after 20 September 1985,

2.    the dwelling was the deceased's main residence just before they died,

3.    and the dwelling was not then being used for the purpose of producing assessable income, and

4.    your ownership interest in the dwelling ends within two years of the deceased's death, or within a longer period allowed by the Commissioner.

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 outlines the factors that the Commissioner will consider when determining whether or not to exercise their discretion to extend the two-year period under section 118-195 of the ITAA 1997. Generally, the Commissioner will allow a longer period where the sale of the dwelling could not be settled within two years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first two years. However, PCG 2019/5 provides that the following factors weigh against the Commissioner allowing a longer period:

•         You waited for the property market to pick up before selling the dwelling

•         Delay was caused to the disposal of the property due to refurbishment of the house to improve the sale price

•         Delay to disposal of the dwelling was caused as a result of inconvenience on the part of the trustee or beneficiary to organise sale of the dwelling, or

•         Delay was caused by unexplained periods of inactivity by the executor in attending to the administration of the estate.

In your circumstances, you were able to control whether or not to undertake the refurbishments prior to listing the property for sale. Additionally, the completion of refurbishments was delayed because you engaged an unlicensed handyman who could not complete works during the COVID-19 lockdowns. Therefore, it is the Commissioner's view that COVID-19 caused delay to the refurbishment of the dwelling, not the disposal of the dwelling. Refurbishment of the dwelling caused a material delay and was the most significant delay in you disposing of your interest in the dwelling. As outlined in PCG 2019/5, delay due to refurbishment of the house to improve the sale price weighs against the Commissioner allowing a longer period.

The Commissioner has not exercised the discretion to extend the two-year period to dispose of a dwelling under section 118-195 of the ITAA 1997. Therefore, any capital gain made on the property from the date the deceased passed away until the property is disposed of will be taxable. That is, the first element of your cost base for the property is its market value on the deceased's date of death. The cost of the refurbishments can also be included in the cost base of the property.

As section 118-195 of the ITAA 1997 does not apply, you may be entitled to a partial exemption of the capital gain or capital loss made on the disposal of the property under section 118-200 of the ITAA 1997.