Edited version of private advice

Authorisation Number: 1051937512912

Date of advice: 11 January 2022

Ruling

Subject: CGT - deceased estate

Question

Will the Commissioner exercise discretion to extend the two-year period to dispose of the dwelling acquired from a deceased estate?

Answer

No.

Question 2

If the answer to Question 1 is no, is the deceased estate assessed on any capital gain?

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 deceased passed away on xx/xx/19xx.

The deceased passed away intestate.

The dwelling was acquired before 20 September 1985 by the deceased.

The land on which the dwelling is located is under 2ha in area.

The dwelling was the main residence of the deceased until death.

The deceased had three children: A, B and C.

No action was taken by any of the three children to administer the deceased's estate.

A resided with their parent at the dwelling.

B and C were estranged from the deceased and A.

B passed away on xx/xx/20xx.

A was living in the dwelling up until their death on xx/xx/20xx, XX years after the deceased passed away.

You were engaged by the Coroner in xx/20xx to administer the estate of A.

Upon engagement to administer A's estate, you discovered the dwelling was not A's but was still in the name of the deceased.

The dwelling was never used for income producing purposes at any point during the deceased's or A's residence.

You located the sole surviving child, C who authorised you to administer their parent's (the deceased) estate on xx/xx/20xx.

Probate for the deceased was granted on xx/xx/20xx.

Contractors were engaged for cleaning and valuation purposes to prepare the dwelling for sale.

A real estate agency was appointed to market and sell the dwelling.

The dwelling was publicly auctioned on xx/xx/20xx and contract signed.

Settlement occurred on xx/xx/20xx.

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 subsection 128-15(4)

Reasons for decision

Detailed reasoning

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 where the deceased acquired their ownership interest in the dwelling before 20 September will be disregarded if:

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

•         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 their death; or

-        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.

The deceased acquired their 100% ownership interest in the dwelling before 20 September 1985. There was no spouse of the deceased residing at the dwelling upon their death, with the only resident in the dwelling at that time being a child of the deceased. As there was no Will, no persons had a right to occupy the dwelling under a Will. An ownership interest did not pass to any beneficiaries who could bring about a CGT event.

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 these circumstances, while we acknowledge once appointed you finalised the estate promptly, the Commissioner must consider the reasons for delay starting in the first two years. The delay was caused by unexplained periods of inactivity in attending to the administration of the estate by the children of the deceased. As there was no Will in place for the deceased, the three children of the deceased were equally empowered to apply for Letters of Administration from which to progress the winding up of the estate. Despite two of the children being estranged from their sibling and parent who were both residing at the dwelling, there was still one child of the deceased who continued to reside at the dwelling after the deceased passed away. Therefore, at least one child had knowledge of the deceased's passing and could have applied for Letters of Administration.

During the two years immediately following the deceased's death, the three children of the deceased made no substantial steps to finalise the estate, to apply for Letters of Administration, or to sell the property.

In this case, there was no challenge as to the ownership of the dwelling, the estate was not complex, there were no unforeseen or serious personal circumstances that prevented the sale by a trustee or beneficiary, and the delay in selling the property is not due to circumstances beyond the beneficiary or trustee's control.

Therefore, it is the Commissioner's view that the delay in administration of the estate was due to inactivity by the three children of the deceased who under intestacy laws were all entitled to equal shares in the estate. As outlined in PCG 2019/5, delay due to unexplained periods of inactivity 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.

Question 2

Detailed Reasoning

The deceased's estate owns the dwelling, in trust for the beneficiaries of the estate. The estate is responsible for selling the property and is liable for any resultant capital gains tax payable. The estate for the deceased declares any gain on its final tax assessment and the capital gain may be distributed to the beneficiaries of the deceased estate.

The value of the property is taken as at the date of acquisition for the deceased's estate. Subsection 128-15(4) of the ITAA 1997 (see item 3 in the table) states the deceased's legal representative is taken to have acquired the property for its market value at the date of death.

Other issues for you to consider

A 50% discount of the capital gain can be used by an individual or a trust (in accordance with sections 115-10 and 115-100 of the ITAA 1997), meaning a deceased estate may be eligible for the discount. In order to utilise the discount, the capital gain must also meet sections 115-20 and 115-25 of the ITAA 1997. In brief, these provisions state the cost base of the asset cannot be indexed, and the asset needs to be acquired at least 12 months prior to sale.

Applied to your circumstances, the first element of the cost base will be market value as at the date of death, and you, as the administrator of the estate, are deemed to have received the property as at this date. As this date was more than 12 months ago, you satisfy this requirement for utilising the 50% capital gain discount.

The cost base consists of five elements, as listed in Section 110-25 of the ITAA 1997. These elements are added together to calculate the cost base. Further information regarding calculating the cost base can be viewed on www.ato.gov.au quick code 66022.