Edited version of private advice

Authorisation Number: 1051921714566

Date of advice: 19 November 2021

Ruling

Subject: Capital gains tax - deceased estate - extension of 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 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 property prior to 20 September 1985.

The dwelling was the main residence of the deceased throughout their ownership period.

The dwelling was never used to derive assessable income.

The deceased's will appointed you as the sole executor and beneficiary of the estate.

Probate was granted on DD/MM/YYYY.

The dwelling was in a state of disrepair both internally and externally including an overgrown garden and leaking roof.

When the real estate agency was first engaged on DD/MM/YYYY, they provided advice as to what work was recommended prior to listing the dwelling for sale.

Roof restoration works involving replacing broken tiles and resealing were completed by the end of YYYY.

The remaining recommended works to prepare the dwelling for sale were undertaken solely by yourself which included removal of the deceased's personal effects, cleaning, internal painting and garden maintenance.

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

COVID-19 lockdowns impacted your ability to attend to the dwelling as it was outside of the 5km radius from your place of residence.

You attended the dwelling whenever COVID-19 restrictions eased to carry out the recommended sale preparations.

The dwelling was listed for sale on DD/MM/YYYY.

The dwelling was scheduled to be auctioned on DD/MM/YYYY but was cancelled due to the reintroduction of COVID restrictions.

A contract of sale was signed on DD/MM/YYYY.

The dwelling settled on DD/MM/YYYY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

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

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:

•         the property was acquired by the deceased before 20 September 1985; or the property was acquired by the deceased 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 (the Commissioner has discretion to extend this period in certain circumstances.

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