Edited version of private advice

Authorisation Number: 1051945379203

Date of advice: 4 February 2022

Ruling

Subject: CGT -deceased estate

Question

Will the Commissioner exercise his discretion to extend the 2-year period for disposal until settlement date of 15 January 20XX?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Person A died some years ago.

They left their property (the Property) to Parent A, and Sibling A and Sibling B.

The Deceased's Will appointed a statutory agency as Executor (the Agency).

The Agency wanted to sell the Property, but it was encumbered by a loan which had been financed by the Deceased.

Because of the loan, the Agency was not able to sell the Property.

A timeline of events is outlined below, detailing the communications between Sibling A, Sibling B, Parent A, solicitors, and the Agency.

By letter dated a short time after the Deceased's death, Sibling A received a Plan of Administration including a form for indicating whether they wished to sell or transfer the Property. The Plan of Administration did not include mortgage details.

Sibling A sent a letter to the Agency, asking various questions including the deadline for indicating whether to sell or transfer the Property.

At about this time, Sibling A was advised that there was time to consider how to proceed regarding the Property.

Sibling A was also advised there was a mortgage on the Property and there were issues regarding selling or transferring the Property.

By letter Sibling A forwarded Solicitor A's advice regarding the mortgage and making a claim on the Estate.

By email, the Agency recommended that Sibling A, Sibling B and Parent A sell the Property. In accordance with the mortgage, they recommended the following amounts be paid:

•         $XX,XXX to Sibling A

•         $XX,XXX to Sibling B and

•         $XXX,XXX to Parent A.

A copy of the same information was also sent by letter on the same day.

Sibling A advised the Agency that you were not obliged to sell the Property and requested further information regarding transfer to the beneficiaries.

You later resent the same email after not receiving a response.

Sibling A advised the Agency that they had made a decision to transfer the Property to the all of the beneficiaries. Sibling A and Parent A's forms for transferring the Property were included with this email.

A short time later, Sibling A received a letter acknowledging they wished to transfer the Property.

Sibling A advised Solicitor A that the Agency had given two options:

•         Transfer the Certificate of Title as per the Will with an equal division and attach the existing mortgage to the Certificate of Title.

•         Draw up a Deed to have the Certificate of Title distributed based on percentages. The Agency have indicated that as Executors they would not be able to do this.

Sibling A and Sibling B also discussed a 3^rd option suggested by Solicitor A to forgive the mortgage, but were not sure whether you would agree.

Sibling B initially gave instructions for the Property to be sold but then changed their instructions to indicate they wanted the Property to be transferred.

Solicitor A replied that transferring the Certificate of Title to the beneficiaries subject to the mortgage would seem to be the quickest and cheapest solution.

Sibling A sent an email to the Agency advising that the beneficiaries had agreed to a transfer of the Property with a mortgage attached to the Certificate of Title.

Sibling A resent the email dated 17 March 2017 regarding the decision to go with option 1 - Transfer the Certificate of Title with mortgage attached as you had had no response from the previous email.

Over the next few weeks, the Agency was contacted by phone regarding lack of progress.

Sibling A received a response to their letter dated shortly after and phone conversation on the same date.

Sibling A reaffirmed the details regarding the transfer as outlined in the relevant email regarding transfer of the Property.

Sibling A also requested a financial statement for the Estate. At this time, it was confirmed that the value of the mortgage was $XXX,XXX.

Solicitor A requested the Agency prepare a Deed of Family Arrangement. Sibling A advised Solicitor A that the Agency had already advised they were unable to do so as Executors.

Sibling A received a draft deed from Solicitor A with mortgage attached but releasing the Agency from any liability.

A short time later, Sibling A informed the Agency that a draft deed had been prepared.

The relationship with Solicitor A ended shortly after. From that time on, your solicitor was Solicitor B.

The draft deed was forwarded to the legal section at the Agency to be looked at urgently.

The amendments requested by the Agency were attended and draft deed attached.

Sibling A, Sibling B and Parent A agreed to rescind the mortgage in order to have the matter resolved and the Estate finalised.

Subsequently, the transfer application was signed by Sibling A, Sibling B and Parent A.

The Property was transferred to Sibling A, Sibling B and Parent A shortly thereafter.

Certificate of Title was received.

Several months later, a contract was signed with a real estate agent (Real Estate A). The Property was not listed on any real estate signs but a For Sale sign was displayed and the real estate agent showed the Property to a number of people. No real interest was shown in the Property, however.

At about the same time, a draft sales contract was drawn up by Real Estate B.

Sibling A and Sibling B worked on the Property a few days per week undertaking renovations. Renovations were completed the following year.

Permission to undertake particular renovations was granted by the Agency.

The Property was listed on an online real estate sales platform.

Contracts were exchanged for sale of the property shortly afterwards.

Settlement occurred on several weeks later.

The Property was valued at $XXX,XXX at the time of the Deceased's death.

Relevant legislative provisions

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 subsection 118-195(1)

Reasons for decision

Question

Will the Commissioner exercise his discretion to extend the 2-year period for disposal until settlement date?

Summary

The Commissioner will not extend the 2-year period for disposal as you have not met the relevant criteria for an extension.

Detailed reasoning

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.

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.

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

In considering whether to extend the two-year period, we weigh up all of the factors (both favourable and adverse) having regard to the facts and circumstances of the case.

Factors that would weigh in favour of the Commissioner allowing a longer period include:

•         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.

The absence of some or all of those favourable factors does not necessarily preclude us from allowing a longer period.

There are several factors that mitigate against the granting of the discretion. These include:

•         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

Generally, we will allow a longer period where a dwelling could not be sold and settled within two years of the deceased's death due to reasons beyond your control. These reasons must have existed for a significant portion of the first two years. Following the resolution of the issues that prevented disposal, the dwelling must be listed for sale as soon as practicable and actively managed to completion.

In this instance, it can be seen that you made repeated attempts to have the Property transferred to the beneficiaries. These attempts took up the majority of the first two years following the death of The Deceased.

However, once Certificate of Title was transferred to you, there was a further period of about XX months before the Property was sold. During this time, you spent several days per week renovating the Property.

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 years' time limit.

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