Edited version of private advice

Authorisation Number: 1051979430355

Date of advice: 16 May 2022

Ruling

Subject: Commissioner's discretion - extend two year period - deceased estate

Question

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

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2021

Year ending 30 June 2022

The scheme commences on:

XX March 2015

Relevant facts and circumstances

The deceased had a 42% ownership interest in a dwelling (the property).

The deceased's daughter held the remaining 58% ownership interest in the property.

The deceased and their daughter purchased the property in December 19YY and held the property as Tenants in Common.

The deceased passed away in March 20YY.

The property was the main residence of the deceased throughout their ownership period, residing with their daughter (majority interest owner) and granddaughter.

The property has never been used to produce assessable income.

The Will of the deceased provides that the rest and residue of the estate of the deceased be held in a testamentary trust.

The Will appoints the deceased's daughter (majority interest owner) and son as executors and trustees of the estate.

Probate was granted in June 20YY.

The deceased provided a right to reside in their will from April 20YY, for their daughter (majority interest owner) and granddaughter until a vesting date of 31 December of the year after either the granddaughter's completion of secondary school, or the date of death of either of them for the survivor, whichever is earlier.

The deceased's granddaughter completed secondary schooling.

The deceased survived the vesting date of the following year but remained living in the property with their daughter (majority interest owner) and granddaughter, and it was their main residence until their death in 20YY.

The beneficiaries of the will are the deceased's five children, including the daughter (majority interest owner), receiving equal shares (1/5) of the 42% ownership interest in the property.

The beneficiaries understood that it was the deceased's wish to extend the vesting date of the right to reside as long as was reasonable and the deceased's daughter (majority interest owner) and granddaughter continued to occupy the property.

The deceased's granddaughter vacated the property in October 20YY.

The property was listed for sale in June 20YY and sold under contract in the same month with a six-month settlement period requested by the buyers.

The deceased's daughter (majority interest owner) vacated the property in December 20YY prior to settlement.

Settlement of the property occurred in December 20YY.

The delay in the sale of the property was caused by the complexity of the estate; the trustees and beneficiaries adhering to the deceased's wishes that the deceased's daughter (majority interest owner) and the deceased's granddaughter could continue to occupy the property as long as was reasonable and the fact that the same deceased's daughter held the majority ownership interest in the property, the estate could not readily sell the property without her agreeing to the sale.

Relevant legislative provisions

Section 118-110 of the Income Tax Assessment Act 1997

Section 118-195 of the Income Tax Assessment Act 1997

Section 66G of the Conveyancing Act 1919 (NSW)

Reasons for decision

Subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or loss may be disregarded where a capital gains tax event occurs disposing of a dwelling passed to a beneficiary of a deceased estate within two-years of the deceased's date of death, or, from the deceased's death until the disposal, the dwelling was the main residence of:

•                    the spouse of the deceased immediately before the death; or

•                    an individual who had a right to occupy the dwelling under the deceased's Will; or

•                    the individual to whom the ownership interest is transferred as a beneficiary and is then sold by that individual.

Additionally, if the property was acquired after 20 September 1985, the dwelling must have been used as the deceased's main residence before their death and not used to produce assessable income.

Paragraph 118-195(1)(b) of the ITAA 1997 allows the Commissioner discretion to extend the two-year period to dispose of a dwelling from a deceased estate. However, this discretion is only limited, and an extension is generally only allowed if there is a delay in the ordinary sale of the property outside the control of the executors of the estate that existed for a significant portion of the first two-years.

Compliance Guideline PCG 2019/5: The Commissioner's discretion to extend the two-year period to dispose of dwellings acquired from a deceased estate (PCG 2019/5) 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. Paragraph 12 of PCG 2019/5 outlines circumstances occurring that would allow the Commissioner's discretion to apply in the disposal of the deceased's property:

•                    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.

Conversely, paragraph 13 of PCG 2019/5 outlines circumstances that would not be considered material to the delay in the disposal of the property:

•                    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.

ATO Interpretative Decision ATO ID 2003/109 - Capital gains tax: Deceased estate - main residence exemption (ATO ID 2003/109) details a situation similar to your circumstances where a taxpayer is one of five beneficiaries and trustee of a deceased estate. The taxpayer is seeking to disregard the capital gain from the sale of the deceased's main residence more than two years after the deceased's death. The executors and beneficiaries allowed one of the beneficiaries to occupy the property until it was sold. As the Will of the deceased did not provide a right to reside at the property in their Will, the view of the Commissioner of Taxation takes into account the general rule of construction, that the intent of the deceased must be ascertained from the words of the Will and that further intent cannot be speculated or inferred after that.

As it was a decision of the executors and beneficiaries to allow the individual beneficiary to occupy the property, and the beneficiary was not provided a right to occupy the property under the Will, the taxpayer could not disregard the capital gain made on disposal of the property.

Another similar example is provided in ATO Interpretative Decision ATO ID 2004/882 - Capital Gains Tax: main residence exemption - deceased estate - right to occupy dwelling for limited period (ATO ID 2004/882) which outlines a situation where a trust is seeking to disregard the capital gain from the disposal of a property in a deceased estate. In this instance, a beneficiary of the estate was provided a right to reside in the property for up to 18 months after the death of the deceased. However, the trustees and beneficiaries allowed this individual to occupy the property beyond the 18-month period stipulated in the Will and for more than 2 years after the expiry of the right to occupy.

The legislation does not allow an exemption for any part of the trustee's ownership period where a person who had a right to reside continues to occupy a property past the expiry stated in the Will. In this case, the deceased's Will provided the right to reside for a limited period, as it was a decision of the trustees and beneficiaries to allow the beneficiary to continue to occupy the dwelling, they are not able to disregard the capital gain from the disposal of the property.

Application to your circumstances

In applying the legislation to your circumstances in the view of the Commissioner of Taxation, there is no specific event or situation that occurred, outside of the trustees' or executors' control, causing a delay in the sale of the deceased's interest in the property. You have noted in your application and the facts that you have provided, the reason for the delay of the disposal of the deceased's interest in the property was the complexity of the estate; the decision of the trustees and beneficiaries to allow the deceased's daughter and deceased's granddaughter to continue to occupy the property based on their understanding of the deceased's wishes and the deceased's daughter's majority ownership interest in the property.

Though it may be implied that it was the deceased's intent to allow their daughter and granddaughter to remain occupying the property due to the right to reside provided in the Will, the expiry of the vesting date and the stipulation of "whichever date is earlier" cannot be ignored. As per ATO ID 2003/109, the general rule of statutory construction infers that in a statute, the intent of the law must be ascertained from the words written in the legislation and that one cannot speculate or guess after that intention.

As the Last Will and Testament is a legal document, the general rule of construction can be applied, and the intent of the deceased should only be determined by the words in the Will and their ordinary meaning. The only intent that can be reasonably inferred is that the deceased would allow their daughter and granddaughter to remain in the property until the end of the year following the completion of the granddaughter's secondary schooling, or, if either of them were to pass away, the successor could remain in the property for the same period; specifying whichever date is earlier.

ATO ID 2004/882 affirms the Commissioner's view that allowing a beneficiary, even with a right to reside stipulated within the Will of the deceased, to stay beyond that period, does not entitle the trust or estate an extension to the two-year rule under section 118-195 of the ITAA 1997. In your situation, there is no right to reside in the property due to the deceased passing after the vesting date expiring.

As the Commissioner's discretion under item 1 of column 3 under paragraph 118-195(1)(b) of the ITAA 1997 to extend the two-year period to dispose of a property and disregard the capital gain or loss is limited to allowing for a delay that is outside of the control of the Trustees or Executors, it cannot be applied to this situation as the decision to allow the deceased's daughter and granddaughter to continue occupying the property was a decision of the trustees and executors and agreed to by the beneficiaries.

Finally, the deceased's daughter's majority ownership interest in the property, combined with her named as a co-executor of the estate and co-trustee to the testamentary trust under the will, presents a potential conflict of interest. As the majority interest owner of the estate, the daughter is entitled to make decisions that benefit her as an individual, some of which fall under paragraph 13 of PCG 2019/5 such as delaying the sale of the property to achieve a more favourable sale price. However as co-executor of the estate and co-trustee to the testamentary trust, the daughter should be working in the best interests of the estate or trust.

It is regrettable that the trustees and beneficiaries had lost both parents in a short period, however, professional advice should have been sought in relation to the ownership interests and administration of the estate, particularly in relation to the conflict of interest of the trustee and majority interest owner. The fact that probate was enacted more than two-years after the death of the deceased demonstrates an unexplained period of inactivity by the executors in attending to the administration of the estate under paragraph 13 in PCG 2019/5. If professional advice was sought, several options were available to the trustees and beneficiaries, including the mechanism of Statutory Sale under section 66G of the Conveyancing Act 1919 (NSW) which would see the sale of the property without the approval of the majority interest owner.

Therefore, under these circumstances, the Commissioner cannot exercise discretion given under subsection 118-195(1) of the ITAA 1997 to allow an extension of time to dispose of ownership interest in the property and disregard the capital gain or loss made on the disposal.

Further information

The deceased's daughter's 58% majority interest in the sale of the property is exempt from CGT under section 118-110 of the ITAA 1997 - commonly known as the Main Residence Exemption. Further information regarding the main residence exemption can be found by searching ato.gov.au for 'QC 66028'.

The remaining 42% interest in the property held by the deceased estate and testamentary trust is subject to CGT.