Edited version of private advice

Authorisation Number: 1051993707260

Date of advice: 29 June 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 and disregard the capital gain or loss you made on the disposal?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

The deceased passed away on DD/MM/YYYY.

The deceased and their partner acquired the dwelling as joint tenants.

The deceased acquired their partner's share in the dwelling upon their passing.

The dwelling was the main residence of the deceased and not used for income producing purposes during their ownership period.

The land adjacent to the dwelling is less than two hectares in area.

On DD/MM/YYYY, the deceased met with the local council along with their children, A and B where they were advised of the council's intentions to acquire the dwelling within the next 3-5 years as a result of a development plan for the area.

On DD/MM/YYYY, the plan was adopted by the council which shows the dwelling is situated within Phase X of the project with an expected timeframe of 10 years plus.

Shortly after the deceased passed away, the executors A and B (collectively 'you') began liaising with real estate agent (R) and other real estate agents.

You are also beneficiaries of the deceased estate.

On DD/MM/YYYY the council responded via letter to an email sent by you on DD/MM/YYYY. The letter explained that the latter phases of the plan are reliant upon infrastructure being constructed by another authority. Any compulsory acquisition of the dwelling by the council would not commence until the latter phases of the plan are imminent and will be funded by a development contributions scheme. It ended to explain that the council was not in a position to commence land acquisitions and are unable to provide advice on whether the dwelling should be sold or rented.

Probate was granted on DD/MM/YYYY.

The transmission application for the dwelling to be transferred to you as executors of the estate was lodged on DD/MM/YYYY.

You did not lodge an application for early acquisition by the council due to hardship as you were unaware of the option and relied upon the council's word that the council had covered all bases.

You were advised by real estate agents that the sale of the property would be difficult and you believed that waiting for the council to acquire the property rather than selling it on the market would achieve the best sale price.

The dwelling was renovated and rented during the period you were awaiting the council to purchase it.

After deciding that you could no longer wait for the council to acquire the property, you engaged R to sell the property in MM/YYYY.

A contract of sale was signed on DD/MM/YYYY.

Settlement occurred on DD/MM/YYYY.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 118-195(1)

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:

•         the property was acquired by the deceased before 20 September 1985; or the property was acquired by the deceased on or after 20 September 1985 and the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income;

and

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

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 the 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 due to refurbishment of the house to improve the sale price

•         Delay 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.

The Commissioner must consider the reasons for delay starting in the first two years. In this case the delay resulted from opinions from real estate agents that the sale of the dwelling would be difficult and your desire to achieve what you considered to be market value for the sale of the dwelling. There was no challenge as to the ownership of the dwelling, the estate was not complex, and there were no unforeseen or serious personal circumstances that prevented the sale by a trustee.

Although the proposed development was beyond your control, this does not mean that the delay in selling the property was beyond your control. If the proposed development meant that it was impossible for you to sell the property on the open market then the failure to sell would be beyond your control. However, you were able to sell the property within a short period after deciding to put it on the market despite the existence of the proposed development. Therefore, it can be seen that the delay was due to your initial choice to wait for the council to acquire the property. Although it is understandable why you made this decision, nevertheless it was a choice and therefore not a matter that was beyond your control.

The council adopted the development plan on DD/MM/YYYY which was prior to the deceased's death. Under this plan, the dwelling was identified as being within Phase X of the plan which had an expected timeframe of 10 years plus.

Correspondence from the council dated DD/MM/YYYY explained that the latter phases of the plan are reliant upon infrastructure being constructed by another authority. Any compulsory acquisition of the dwelling by the council would not commence until the latter phases of the plan are imminent and will be funded by a development contributions scheme.

Within three months of the deceased's death, you had information from the relevant authorities that the council would not be proceeding with a compulsory acquisition of the dwelling for at least 10 years. This timeframe is significantly greater than the two-year period you had to dispose of the dwelling and not be liable for a capital gain or loss on the sale.

The Commissioner acknowledges the dwelling is located in an area subject to a development plan and could be compulsorily acquired in the future which may have influenced the ability to sell the dwelling for what you considered to be market value. However, it is the Commissioner's view that this did not prevent you from attempting to sell the dwelling and you instead chose not to attempt the sale earlier. You were waiting for the council to acquire the dwelling and you had formed the view that the dwelling would not sell on the open market for what you considered to be market value. As such, no attempts to sell to the open market were made until MM/YYYY, XX months after the two-year period had expired.

Once the dwelling was listed for sale, there was a short turnaround to when the contract was signed. This suggests that there was a market for sale of the dwelling which was not exploited earlier.

The significant timeframe for council acquisition of the dwelling was quite clear within the early stages of you acquiring your ownership interest in the dwelling. Despite the excessive timeframe for compulsory acquisition, this was still the major focus when attempting to dispose of the dwelling. It is apparent that this effort to achieve what you considered to be market value through acquisition of the dwelling by the council delayed disposal of the dwelling.

As outlined in PCG 2019/5, waiting for the property market to pick up before selling the dwelling weighs against the Commissioner allowing a longer period. Whilst you were not waiting for the overall property market to pick up, you were waiting for the council to acquire the dwelling in order to achieve a higher sale price. This goes against the intent of the PCG that an extension should not be allowed where the delay was due to efforts to achieve a higher sale price for the dwelling.

PCG 2019/5 also indicates that renovating and renting out the dwelling during the period of delay would also be matters that generally weigh against the allowing of an extension of time.

Having regard to all the circumstances, 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 subject to tax. 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 renovations, less any deductions (such as capital works deductions) that have been claimed in relation to the renovations, can also be included in the cost base of the property. You are also entitled to the 50% CGT discount in relation to the property.