Edited version of private advice

Authorisation Number: 1052031294445

Date of advice: 19 September 2022

Ruling

Subject: CGT - 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 capital loss you made on the disposal?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased obtained an XX% ownership interest in the property jointly with their spouse before 20 September 1985.

After 20 September 1985, the deceased obtained the other XX% share in the property by survivorship.

The deceased passed away.

The property was the deceased's main residence just before they passed away.

Probate was granted to the deceased's three children who were appointed as the executors and beneficiaries of the Will.

A legal representative assisted with the administration of the estate until approximately 1 year and 9 months after the deceased passed away, where the executors took over the administration of the estate.

Funds were transferred from the legal representative's trust account into the deceased estate's bank account.

Some shares were transferred to the beneficiaries shortly after the executors took over the administration of the estate.

Another property was transferred to the beneficiaries approximately a year after the deceased passed away and then subsequently sold to two of the beneficiaries approximately three years after the deceased passed away.

The remaining shares and the property remained in the estate due to disagreements between the executors about how the estate should be administered. The disagreement led to an impasse between the executors.

Approximately three years and nine months later, one of the executors submitted an application to remove the other two executors from administering the estate.

The other two executors defended the application and a hearing was scheduled.

A year after the application was submitted to remove two of the executors, all three executors submitted to the court that an independent administration was to be appointed.

Shortly after, a court order was issued and an independent administrator was appointed

The independent administrator prepared the property for sale promptly and it was listed on the market shortly after a vendor's advocate was appointed.

The property was sold at auction.

The purchaser requested an extension to the settlement date and was granted an extension.

The property settled.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Detailed reasoning

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 will be disregarded where:

•         the deceased acquired their ownership interest in the dwelling before 20 September 1985, or

•         the deceased acquired their ownership interest in the dwelling 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

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:

-        the spouse of the deceased immediately before their death; or

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

-        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 2 years of the deceased's death, or within a longer period allowed by the Commissioner.

The deceased acquired 100% ownership interest in the dwelling with a 50% pre-CGT interest and 50% post-CGT interest. There was no one who was residing at the property upon their death. No persons had a right to occupy the dwelling under a Will and no ownership interest passed to any beneficiaries who could bring about a CGT event.

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 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 was caused to the disposal of the property due to refurbishment of the house to improve the sale price

•         Delay to disposal of the dwelling was caused 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.

In these circumstances, while we acknowledge the independent administrator, once appointed finalised the estate promptly, the Commissioner must consider the reasons for delay in the first two years after the deceased passed away.

During the two years immediately following the deceased's death, the delay was mainly caused by disagreements between the children of the deceased. This resulted in inactivity by the executors in attending to the administration of the estate and to organise the sale of the property. As there was a Will in place for the deceased, the three children of the deceased were equally empowered to administer the estate from which to progress the winding up of the estate.

In this case, formal legal proceedings to remove two of the executors of the estate was only submitted approximately three years and three months after the deceased passed away. There was no legal challenge to the Will for the ownership of the dwelling, the estate was not complex, there were no unforeseen or serious personal circumstances that prevented the sale by a trustee or beneficiary within two years of the deceased passing away, and the delay in selling the property is not due to circumstances beyond the beneficiary or trustee's control.

Therefore, it is the Commissioner's view that the delay in administration of the estate was due to inactivity and disagreement by the three children of the deceased on how to administer the estate. As outlined in PCG 2019/5, delay due to unexplained periods of inactivity and inconvenience on the part of the trustee or beneficiary to organise sale of the dwelling weighs against the Commissioner allowing a longer period.

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 taxable. That is, the first element of your cost base for the property is its market value on the deceased's date of death.