Edited version of private advice

Authorisation Number: 1051983493884

Date of advice: 31 May 2022

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner allow an extension of time to XX XXXX 20XX for you to dispose of your ownership interest in the dwelling and disregard the capital gain or loss you made on the disposal?

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

The Deceased owned a dwelling.

The Deceased acquired the dwelling after 20 September 1985.

The dwelling size is less than 2 hectares.

The Deceased treated the dwelling as their main residence throughout the ownership period. The Deceased lived in the dwelling until they moved into a nursing home in Autumn 20XX.

The dwelling was tenanted from Autumn 20XX until Summer 20XX.

The Deceased passed away in Spring 20XX.

The Deceased's Will appointed his two children as the beneficiaries and executors.

The title of the dwelling was not transferred from the Estate of the Deceased to the beneficiaries.

In Summer 20XX, personal effects were cleared from the dwelling. The Deceased's Will and other documents to enable the estate administration to proceed were also located.

The Witness to the Will and Affidavit were obtained.

Probate documents and affidavits were not able to be witnessed by a Justice of the Peace due to COVID-19 lockdowns in State A during Autumn 2020.

Grant of Probate was obtained in Winter 20XX.

The dwelling was prepared for sale from Winter to Spring 20XX. This included removing furniture, clearing overgrown gardens and tidying the dwelling.

The Executor was restricted from travelling to the dwelling during Summer 20XX-XX due to lockdown restrictions.

The Executor was again restricted from travelling due to lockdown restrictions between Winter and Spring 20XX.

The beneficiaries agreed to proceed with the sale in or around Spring 20XX.

The beneficiaries contacted the Agent in Spring 20XX to have the tenant vacate as the lease had expired, thinking that only 2 weeks' notice was required. However, they were advised that they had to give the tenant 3 months' notice to vacate.

A Conveyancer was contacted in Spring 20XX.

The sale contracts were prepared.

An Estate Agent was contacted later in Spring 20XX.

The dwelling was listed for sale.

A contract to sell the dwelling was entered into in Summer 20XX.

Settlement occurred in Autumn 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

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.

Subsection 118-195(1) of the ITAA provides that a capital gain or loss will be disregarded if:

•         the dwelling was acquired by the deceased on or after 20 September 1985;

•         the dwelling was used as the deceased's main residence just before their death and not used to produce assessable income at that time; and

•         your ownership interest ends within 2 years of the deceased's death (the Commissioner has discretion to extend this period in certain circumstances).

You have an ownership interest in a dwelling if you have a legal interest in the dwelling. This means that if you sell a dwelling, your ownership interest continues until the date of settlement (rather than the date the contract of sale is signed).

In this case, the dwelling continued to be the Deceased's main residence despite having moved to a nursing home. The dwelling was rented out for a period of time which was less than six years, and the Deceased could choose to treat the dwelling as his main residence under the absence rule in subsection 118-145 of the ITAA 1997.

The dwelling sale settled more than two years after the Deceased's death. Therefore, you will only be able to disregard the capital gain from the sale of the property if the Commissioner extends the two year time period.

The following is a non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion:

•         the ownership of a dwelling or a will is challenged

•         the complexity of a deceased estate delays the completion of administration of the estate

•         a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two year period (for example, the taxpayer or a family member has a severe illness or injury)

•         settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for reasons outside the beneficiary or trustee's control

In determining whether or not to grant an extension the Commissioner is also expected to consider whether and to what extent the dwelling is used to produce assessable income and how long the trustee or beneficiary held it. The dwelling was rented out for approximately 3.5 years which is a substantial amount of time. The Executors chose not to list the dwelling for sale while it was tenanted. Although not determinative, the fact that the dwelling was producing assessable income from before the Deceased passed away until the sale of the dwelling is a factor mitigating against the granting of the discretion.

It is noted that a global pandemic caused lockdown periods during parts of the 2020 and 2021 calendar years, which resulted in some delays. However, the sale of the dwelling was not actively managed during the COVID-19 pandemic.

The delays were ultimately in the control of the Executors who were administering the Estate. In this case, the only positive act that occurred within the first year after the Deceased passed away was the preparation of the dwelling for sale. Some of these works were undertaken by the Executors as a choice. Removing furniture and clearing the garden were not necessary for the dwelling to be listed. The dwelling was not marketed for sale in a timely fashion. Tidying the dwelling was also not necessary for the sale to have occurred. These works took longer than necessary to list the dwelling for sale and were not completed until approximately ten months after the Deceased passed away. They may have increased the potential sale price but were not an impediment to the sale.

No other steps were taken to actively manage the sale of the dwelling until Spring 20XX, when the beneficiaries contacted the Agent to have the tenant vacate and contacted the conveyancer.

On numerous occasions during 20XX and 20XX, real estate services restrictions eased providing opportunity to market the dwelling and arrange a sale. However, you chose to extend the tenancy after the initial 12 month agreement expired. The listing of the dwelling and ultimate sale of the dwelling took longer than necessary. The dwelling was not listed for sale until two years after the Deceased passed away.

One positive factor is that we consider five months to be a relatively short extension. However, the main reasons for the Commissioner not exercising the discretion are:

•         You chose not to list the dwelling for sale while it was tenanted after the Deceased passed away

•         There are extensive periods of inactivity between the date of death of the Deceased and settlement of the sale of the dwelling

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 year time limit. The normal capital gains tax (CGT) rules will apply to the disposal of the dwelling. Therefore, any capital gain made on the dwelling from the date the Deceased passed away until the dwelling was disposed of will be subject to tax. That is, the first element of your cost base for the dwelling is its market value on the Deceased's date of death. You are also entitled to the 50% CGT discount in relation to the dwelling.