Edited version of private advice

Authorisation Number: 1052036998948

Date of advice: 30 September 2022

Ruling

Subject: Capital gains tax

Question

Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the 2-year capital gains tax (CGT) exemption to dispose of the property?

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 died several years ago.

The property was the main residence of the deceased for the entire period of ownership.

The property has not been occupied after that time.

Probate was granted in the year after the date of death.

In the following year, lockdowns were put in place at the national and state levels.

The property was placed on the market a couple of months before settlement.

An offer was made within days of being put up for sale and contracts were signed.

Settlement of the contract occurred more than 2 years after the date of death.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Dwelling acquired from a deceased estate

According to subsection 118-195(1), for property acquired by the deceased on or after 20 September 1985, which was the deceased's main residence just before they died and was not then being used for the purpose of producing assessable income, you will be entitled to disregard any capital gain made on the disposal of the property if:

1.            your ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner; or

2.            the dwelling was, from the deceased's death until your ownership interest ends the main residence of one or more of:

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

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

c)            an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary.

Commissioner may extend the 2 -year period

The Commissioner has discretion to extend the 2-year time period where the trustee or beneficiary of a deceased estate's ownership interest ends after 2 years from the deceased's death.

A trustee or beneficiary of a deceased estate may apply to the Commissioner to grant an extension of the 2- year period, where a CGT event happens in the 2008-09 income year or later income years. Subsection 118-195(1) was amended by No 12 of 2012 and the Explanatory Memorandum to this Act states:

The Commissioner would be expected to exercise the discretion in situations such as where:

•                     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 2-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 circumstances outside the beneficiary or trustee's control.

These examples are not exhaustive.

In exercising the discretion the Commissioner will also take into account whether and to what extent the dwelling is used to produce assessable income and for how long the trustee or beneficiary held the ownership interest in the dwelling.

Practical Compliance Guideline PCG 2019/5: The Commissioner's discretion to extend the 2-year period to dispose of dwellings acquired from a deceased estate outlines what factors are considered when deciding whether the Commissioner will exercise their discretion to extend the 2-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 2 years of the deceased's death due to reasons beyond your control.

In considering whether to extend the 2-year period, we weigh up all of the factors (both favourable and adverse) having regard to the facts and circumstances of the case. PCG 2019/5 states that a favourable factor to extend the 2-year period is if the dwelling is listed for sale as soon as practically possible after the circumstances that were delaying the sale ended. In your case the property was not listed for sale once it became available to, which constitutes a period of inactivity by the executor in attending to the administration of the estate.

We have considered all your circumstances but as there were significant periods of delay both in applying for Probate and listing the property for sale, and you have not provided any information to indicate that there were issues beyond your control, the Commissioner will not exercise the discretion to grant an extension of time.

Therefore, any capital gain made on the property from the date the deceased passed away until the property was disposed of will be subject to capital gains tax.