Edited version of private advice

Authorisation Number: 1052015297402

Date of advice: 23 August 2022

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise the discretion to allow an extension of time for you to dispose of your ownership interest in the property 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 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased acquired the property after 19 September 1985.

The property was the main residence of the deceased just before they passed away and was not used to produce assessable income at that time.

The property was situated on less than two hectares of land.

The deceased passed away after 19 September 1985.

Shortly after, probate was granted.

Later, the property was transferred to the deceased's adult child (you), as beneficiary of the estate.

From this time until settlement of the sale of the property, there were many days of disruption caused by

COVID-19 restrictions which impacted travel to the property, tradesperson and materials availability, and time taken to prepare the property ready for sale. The property was in a deteriorated condition and many items in the house needed to be cleared. There were many days of Government imposed lockdowns from the date of death of deceased until the sale of property.

During the year before the property was sold, the property was extensively renovated.

The total cost of the renovations was close to $XXX.

During this period, there were also significant storms which caused damage to the property and it was without power for two weeks.

The property was listed for sale after the renovations were completed.

The property sold quickly, and the sale settled less than seven months after the two-year period ended.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

Question

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

Summary

No.

The extensive refurbishment of the house to improve the sale price was material to the delay in disposing of your interest. As well as completing repairs, you also engaged builders to undertake other significant renovations to improve the value of the property before sale.

We acknowledge some of the work completed was for minor repairs, and the extension required is not substantial. However, the most significant factor in delaying the sale was the decision to renovate the property, which was entirely within your control.

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 after 19 September 1985 that was their main residence and not used to produce assessable income just before their death, 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:

o   the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased)

o   an individual who had a right to occupy the dwelling under the deceased's will, or

o   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.

In your case, the deceased acquired the property after 19 September 1985. After the deceased passed away, the property was transferred to you as beneficiary of the estate. The property was the deceased's main residence until just before they passed away and was 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.

In your case, the property sale settled more than two years after the deceased's death. Therefore, you require the Commissioner's discretion to extend the two-year period to be eligible for an exemption.

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), or

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

Factors that would weigh against the Commissioner allowing a longer period 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.

When deciding whether 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.

Chapter 5 of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No.3) 1997 explains the background to the principal residence exemption. Paragraph 5.16 explains the reason for extending the period from 12 months to two years was to give beneficiaries and trustees more time to arrange the orderly sale of the property.

In your case, one positive factor is that we consider a period of less than seven months is not a substantial extension. However, the main reasons for the Commissioner not exercising the discretion are:

•         You chose to complete extensive refurbishment of the house to improve the sale price, a decision which was entirely within your control.

•         We acknowledge COVID restrictions presented delays in getting tradespeople to quote and complete the repairs and refurbishments. You contend that the work would have been completed within the two-year period but for the restrictions. However, you chose to continue with your plans for extensive refurbishment of the property despite experiencing regular delays due to COVID restrictions.

•         From seven months before the end of the two-year period you had the choice to sell as is, do minor repairs or renovate. You chose to extensively renovate despite the delays experienced previously with COVID and the risk of further delays.

•         We acknowledge there were significant storms which caused damage to the property and it was without power for two weeks. However, even if there had been no storm damage, the renovations would still not have been completed within the two-year period.

•         You did not use the two-year period to arrange the orderly sale of the property, rather you used this period to complete extensive renovations to the property.

Having considered the relevant facts, the Commissioner will not apply his discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the two-year time limit. Therefore, the normal capital gains tax (CGT) rules will apply to the disposal of the property. You should note that 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 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.