Edited version of private advice

Authorisation Number: 1051977128938

Date of advice: 4 May 2022

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner allow an extension of time for you to dispose of your ownership interest in the dwelling (the property) and disregard the capital gain or loss you made on the disposal?

Answer

No.

This ruling applies for the following period:

The year ended 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 after 20 September 1985.

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

The property has never been used to produce assessable income.

The property was less than two hectares in size.

The deceased had two children, Child 1 and Child 2 (you), who were equal beneficiaries of the estate.

Child 1 was the sole executor of the deceased's estate.

Child 1 was the deceased's primary carer up until their death.

Child 1 had resided in the deceased's property their entire adult life, was not employed and had health disorders.

The deceased's Will did not create or grant any right to reside in the property after the deceased's death.

Child 2 did not contest the deceased's will or seek legal advice in relation to the property.

Child 1 continued to utilise the property as their main residence following the deceased's death.

Child 1 did not pay any form of consideration to Child 2 pertaining to their continued residence at the property.

Child 1 maintained the property and paid the utility bills unassisted.

Child 1 subsequently decided they needed to move into a care situation on a full-time basis. Child 1 and 2 then decided to sell the property.

A contract to dispose of the property was entered into on DD/MM/YYYY, with settlement occurring on DD/MM/YYYY.

Your contentions

You have made the following contentions:

•         That there was a verbal understanding between the deceased, Child 1 and yourself that Child 1 would be permitted to reside in the property for as long as they chose to following the deceased's death and that this amounted to a right to occupy for Child 1.

•         You, being aware of the verbal understanding, believed you had no real influence or apparent necessity at the time to force or exert influence on Child 1 to vacate the property.

•         You had long been aware that the deceased's intentions were that Child 1 would have a right to occupy the property until Child 1 passed away, chose to move, or their health necessitated a move.

•         As you had your own family and family home, you willingly accepted the deceased's intention to allow Child 1 to reside in the property following the deceased's death.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

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:

1.    the deceased acquired their ownership interest in the dwelling on or after 20 September 1985,

2.    the dwelling was the deceased's main residence just before they died,

3.    the dwelling was not then being used for the purpose of producing assessable income, and

4.    your ownership interest in the dwelling ends within two years of the deceased's death, or within a longer period allowed by the Commissioner.

Alternately, subsection 118-195(1) of the ITAA 1997 also provides that a CGT exemption may be available to beneficiaries and trustees where a CGT event happened to a dwelling they acquired from a deceased estate and the dwelling was, from the deceased's death until your ownership interest ends, the main residence of an individual who had a right to occupy the dwelling under the deceased's will.

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.

The factors that the Commissioner will consider to be favourable are listed in paragraph 12 of the PCG as follows:

•         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.

We acknowledge your contention that Child 1 had a right to occupy the property due to a purported verbal agreement. However, it was never confirmed by a court that Child 1 did have a legal right to occupy. You could have sought legal advice on whether the purported understanding amounted to a legal right to occupy and if Child 1 could be compelled to vacate the dwelling so it could be sold. You advise that you did not seek legal advice on this matter because you accepted Child 1 had a right to occupy and, in any case, Child 1 was the sole executor so you had no real influence on their occupation of the property. However, it is possible that a court may not have accepted that Child 1 had a right to occupy and if that was the case, they could have been compelled to sell the property or been removed as executor if they refused, as an executor is obligated to act in the best interests of all the beneficiaries. The fact that you accepted that Child 1 had a right to occupy doesn't mean that Child 1 actually had such a right. You have provided reasons why you were happy to allow Child 1 to continue to reside in the property. The fact that you allowed Child 1 to occupy the property does not mean that they had a right to occupy, rather it was a choice that you made.

Before we could accept that it was outside the control of the beneficiaries or trustee to sell a property within the two-year period due to a right to occupy that is not set out in a will, we would generally require confirmation via the courts that a legal right to occupy the property existed. At the very least we would expect legal advice to be sought, that is, we could understand if you received legal advice that Child 1 had a legal right to occupy and decided to follow that advice rather than expend funds to have it confirmed by the courts. However, the fact that you never sought legal advice leaves open the possibility that Child 1 did not have actually have a legal right to occupy and their continued occupation of the dwelling was simply due to your choice to allow them to do so.

Also, in the absence of exceptional circumstances, the wording in PCG 2019/5 demonstrates that a right to reside needs to be contained within the deceased's will for the presence of a right to reside to be considered a favourable factor when the Commissioner is deciding whether or not to exercise the discretion.

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 your share of the property from the date the deceased passed away until the property was disposed of will be subject to tax. That is, the first element of your cost base for your share of the property is its market value on the deceased's date of death. You are also entitled to the 50% CGT discount in relation to the property.