Edited version of private advice

Authorisation Number: 1051861926528

Date of advice: 20 July 2021

Ruling

Subject: Commissioner's discretion to extend two year period

Question

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

Answer

No.

This ruling applies for the following period

Year ended 30 June 20xx

The scheme commences on

1 July 20xx

Relevant facts

The deceased acquired a dwelling (the dwelling).

The deceased passed away in 20xx. (The deceased)

The dwelling is located on land that is less than two hectares.

The dwelling was the deceased's main residence.

The deceased's will named a number of executors, (A), (B), (C) and (D).

A, B and C renounced probate.

Person C was estranged from the deceased for a number of years.

The executor approached legal representatives in 20xx with assistance in administering the estate.

The legal representatives experienced difficulties in locating person C to inform them of the death of the death and to advise them of a potential claim on the estate.

Person C was located around XX 20XX and the legal representatives received confirmation of their identity a short time later.

Negotiations between the beneficiaries continued and delays were experienced as a result.

An application for Grant of Probate was lodged after a period of time.

Application for Grant of Probate was rejected and subsequently re-lodged.

Probate was granted shortly afterwards.

The executor was advised around xx 20xx to undertake some works before the property could be listed. The executor obtained some estimates, however these were more than the estate or beneficiaries were able to fund. With the last estimate at $x.

The funds were obtained and the works were completed in 20xx.

Some further works were undertaken. It was anticipated that the property would be listed for sale a short time later.

This did not occur and the dwelling was still being prepared for sale

It was discovered that further works were required.. Works to continue as suggested by the real estate agent. Valuation and appraisals have been obtained around xx 20xx with the property expected to go to market shortly.

The works had stopped due to COVID-19 for a period of time.

The property has been occupied by one of the deceased's children and their XX children. Alternative accommodation was required to be obtained and difficulties were experienced.

The executor signed an agency agreement on xx x 20xx. The Agent wanted $x upfront in order to take marketing photographs which the executor needed to raise.

The executor was unable to list the property as their sibling cannot find anywhere to live and has four children in the period around xx 20xx.

The executor was able to find accommodation for their sibling and they vacated the dwelling on xx 20xx and the executor anticipated placing the property on the market within that week.

Executor experienced delays with meeting with real estate agent as family in isolation due to COVID case at child's school around xx 20xx.

The property had been purchased however the purchaser then cooled off on within the allowed period.

A sale contract was executed on shortly afterwards.

Settlement completed after a period of time.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 115-A

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-130

Income Tax Assessment Act 1997 section 118-195

Reasons for Decision

A capital gain or capital loss may be disregarded under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) where a capital gains tax event happens to a dwelling if it passed to you as an individual and a beneficiary of a deceased estate or you owned it as the trustee of the deceased estate.

For a dwelling acquired by the deceased prior to 20 September 1985, you will be entitled to a full exemption if:

•         the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of the following individuals:

- the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased)

- an individual who had a right to occupy the dwelling under the deceased's will, or

- an individual beneficiary to whom the ownership interest passed and the CGT event was brought about by that person, or

•         your ownership interest ends within two years of the deceased's death.

For a dwelling acquired by the deceased on or after 20 September 1985, the dwelling must have been used as the deceased's main residence just before their death and not used to produce assessable income at that time.

In your case, when the deceased died, an interest in the dwelling passed to you. The dwelling was the deceased's main residence prior to death, and at that time, was not being used to produce assessable income. 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.

The dwelling sale settled more than two years after the deceased's death, therefore, the alternative basis of exemption is also not satisfied.

However, subsection 118-195(1) of the ITAA 1997 confers on the Commissioner discretion to extend the two year exemption period.

The following is a non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion:

•         the ownership of a dwelling or a will is challenged

•         the complexity of a deceased estate delays the completion of administration of the estate

•         a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two year period (for example: the taxpayer or a family member has a severe illness or injury), or

•         settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for reasons outside the beneficiary or trustee's control.

In determining whether or not to grant an extension the Commissioner is also expected to consider whether and to what extent the dwelling is used to produce assessable income and how long the trustee or beneficiary held it.

In your case the main reason for the Commissioner not exercising the discretion is that there are extensive periods of inactivity between the date of death of the deceased and settlement of the sale of the dwelling.

The executor had a number of responsibilities in winding up the estate of the deceased and one of these was to do with the ownership of the dwelling. Only one positive act occurred in the first xx months after the deceased passed away and the eventual sale did not occur until more than x years had passed from the date of death.

The executor should have been aware of the possible capital gains tax implications of not transferring title to the dwelling.

The works undertaken by the executor in relation to the dwelling were a choice and were not necessary for the sale to have occurred, they may have increased the potential sale price however were not an impediment to the sale. They also appear to have been undertaken quite slowly given that they remained ongoing a year after probate had been granted (until being stopped due to COVID19).

It was a choice of the executor to allow the beneficiary to continue to remain residing in the dwelling and alternative arrangements could have been made during the period of administration.

Having considered the relevant facts, the Commissioner will not apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit.

The normal capital gains tax (CGT) rules will apply to the disposal of the property.