Edited version of private advice

Authorisation Number: 1051905169654

Date of advice: 30 September 2021

Ruling

Subject: CGT - deceased estate

Question

Will the Commissioner exercise discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to the two-year period for executors of the estate to dispose of the property?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The late Mr A acquired a property ('the property') in 20AA.

Mr A passed away on DD-MM-20YY. The probate was granted X months later.

The Last Will of Mr A appointed the XX children as the executors of the estate (the Estate). The will states that all assets of the Estate will be distributed to the XX children of Mr A.

The property has been Mr A's main residence just before the death.

Following the passing of Mr A, the property was occupied by the surviving spouse.

Over the past XX years since the passing of Mr A, the executors of the Estate have attended multiple court cases and mediations as the will was challenged by Mr A's surviving spouse.

Following several mediations with Mr A's surviving spouse, the parties could not agree over the ownership of the property and the settlement sums. Therefore, in 20XX, the executors applied to the Supreme Court to sell the property to pay down the existing liabilities of the Estate and the court decided that the property can be disposed by the Estate.

Since the court decision in MM-20YY, the executors have been working closely with the lawyer to finalise the legal documents. As the executors live outside the state where the property was situated, the executors were not able to travel to the state due to the interstate COVID-19 travel restrictions in place in the past few months. This has created some delays in organising the sale listing.

The property was listed for sale soon after the legal documents were finalised. The property was sold in an auction X months later and the settlement is expected to take place X months after the auction.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

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

Income Tax Assessment Act 1997 section 118-195

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

Reasons for decision

Subsection 118-195(1) of ITAA 1997 states that 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:

• 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
• both of the following requirements are satisfied:

­   the deceased acquired the ownership interest on or after 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; and

­   your ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner; and

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

In other words, the Commissioner has discretion to extend the two-year time period in subsection 118-195(1) of the ITAA 1997 where the trustee or beneficiary of a deceased estate's ownership interest ends after two years from the deceased's death.

Practical Compliance Guideline 2019/5 - The Commissioner's discretion to extend the two-year period to dispose of dwellings acquired from a deceased estate (PCG 2019/5) provides guidance on circumstances in which the Commissioner may exercise his discretion in extending the two-year period. It outlines a safe harbour compliance approach that allows taxpayers to manage their tax affairs as if the Commissioner had exercised the discretion to allow them a period longer than two years.

Paragraph 11 of the PCG 2019/5 outlines the conditions of the safe harbour compliance approach as follows:

Safe harbour - conditions

11. To qualify for the safe harbour, you must satisfy all of the following conditions:

• during the first two years after the deceased's death, more than 12 months was spent addressing one or more of the circumstances described in paragraph 12 of this Guideline
• the dwelling was listed for sale as soon as practically possible after those circumstances were resolved (and the sale was actively managed to completion)
• the sale completed (settled) within 12 months of the dwelling being listed for sale
• if any of the circumstances described in paragraph 13 of this Guideline were applicable, they were immaterial to the delay in disposing of your interest, and
• the longer period for which you would otherwise need the discretion to be exercised is no more than 18 months.

Paragraph 12 of the PCG 2019/5 outlines the circumstances in which the Commissioner may exercise his discretion in extending the two-year period as they may take more than 12 months to resolve:

Circumstances that took more than 12 months to resolve

12. One or more of the following circumstances must have taken more than 12 months to address:

• 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.

Paragraph 13 of the PCG 2019/5 outlines the circumstances in which the Commissioner will not exercise his discretion in extending the two-year period as they cannot be material to delays in disposal of the dwelling:

Circumstances that cannot be material to delays in disposal

13. In order to qualify for the safe harbour, none of the following circumstances can have been material to the delay in disposing of your interest:

• waiting for the property market to pick up before selling the dwelling
• delay due to refurbishment of the house to improve the sale price
• inconvenience on the part of the trustee or beneficiary to organise the sale of the house, or
• unexplained periods of inactivity by the executor in attending to the administration of the estate.

Application to your circumstances

It is determined that the Trustee of G Estate satisfies all the conditions in paragraph 12 to qualify for the safe harbour approach because:

• The will of Mr A was challenged by the surviving spouse and the legal matters have not been finalised;
• The delay in organising the sale listing was caused by the fact that the executors were unable to travel to state (where the property was situated) due to of the interstate COVID-19 travel restriction, which was beyond their control.
• The property was listed for sale as soon as:

­   the legal documents were finalised following the court decision in MM-20YY;

­   the property was cleaned so that it is ready for viewings; and

­   the viewings and auction date were organised between the executors and the real estate agent.

• The property was listed for sale in MM-20YY and was sold within 2 months.
• The circumstances mentioned in paragraph 13 of the PCG 2019/5 were immaterial to the delay in disposing the property due to the interstate border restrictions, and
• The property was disposed within 18 months after the two-year period which ended on DD-MM-20YY.

While the trustee qualifies for the safe harbour approach in PCG 2019/5, for clarity, the Commissioner will grant the trustee the discretion to extend the period to dispose of the property under section 118-195(1) ITAA 1997 by a further 12 months.