Edited version of private advice

Authorisation Number: 1052039118180

Date of advice: 28 October 2022

Ruling

Subject: CGT - deceased estate - 2-year discretion

Question

Will the Commissioner exercise his discretion under section 118-195 of the Income Tax Assessment Act 1997 to allow an extension of time to dispose of your one-half share in the property to the other beneficiary and disregard the capital gain made on the disposal?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX.

The scheme commences on:

01 July 20XX.

Relevant facts and circumstances

After the introduction of capital gains tax the deceased purchased a property (the dwelling).

The deceased lived in the dwelling as their main residence.

Many years later the deceased passed away.

You and your sibling were beneficiaries of the deceased's estate.

You and your sibling inherited a 50% ownership interest each in the dwelling as tenants in common.

Shortly after the deceased passed away your sibling moved into the dwelling.

Your sibling didn't have enough funds to purchase your 50% ownership interest in the dwelling from you.

A short time later the dwelling was transferred to both you and your sibling as tenants in common in equal shares.

Your sibling remained in the dwelling as their main residence after the dwelling had been transferred to both of you.

There were no provisions in the deceased's will which allowed your sibling to reside in the dwelling indefinitely.

You allowed your sibling to reside in the dwelling instead of taking legal action.

You decided to move and persuaded your sibling to buy your 50% ownership interest in the dwelling.

The dwelling remained the main residence of your sibling until it was sold X years and X months after the deceased passed away.

Your sibling purchased your 50% ownership interest in the dwelling.

Approximately X years and X months after the deceased passed away settlement occurred on the dwelling.

No action was taken by you to remove your sibling from the property in order to sell the property in a timely manner.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that capital gains tax (CGT) is incurred when a CGT event takes place and either a capital gain or a capital loss results. Any capital gain is added to any other assessable income for the relevant year and is then taxed at the appropriate marginal tax rate. A capital loss can be offset against other current year capital gains or carried forward indefinitely to be offset against future year capital gains.

The most common CGT event is known as CGT event A1 and generally occurs whenever there is a change in ownership of a CGT asset from one party to another.

CGT and deceased estates

Section 128-20 of the ITAA 1997 explains that where a taxpayer dies, there are no CGT implications where an asset passes to the legal personal representative or beneficiary, but CGT may apply when the asset is subsequently disposed of. Assets forming part of the deceased estate are deemed to have been acquired by the representative or the beneficiary at the date of death of the deceased.

You therefore acquired your ownership interest in the dwelling on the date your parent passed away.

Full main residence exemption

In 1986, an explanatory memorandum was released which introduced CGT with the exemption period of 12 months.

This meant that trustees or beneficiaries of a deceased estate had 12 months from the date of the deceased passing away to dispose of an inherited dwelling to be eligible for the exemption. The intention behind this legislation was that the inherited dwelling was to be immediately sold after the date the deceased passed away.

This period was extended to 2 years by Parliament from 1996 to allow for situations where the trustees or beneficiaries of a deceased estate had difficulty arranging an orderly sale of the deceased's dwelling within the current 12-month period. This extension gave trustees and beneficiaries more time to make appropriate arrangements by extending the period by 12 months.

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 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 Income Tax Assessment Act 1997.

Subsection 118-195(1) of the ITAA 1997 states that if you owned a dwelling in your capacity as trustee of a deceased estate (or if it passed to you as a beneficiary of an estate), then you are exempt from tax on any capital gain made on the disposal of the property 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 one of:

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

•                     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; or

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

c)            if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary - that individual.

However, the Commissioner has the power under section 118-195 of the ITAA 1997 to extend the 2-year period to dispose of an inherited dwelling in relation to CGT events that happened in the 2008-09 income year and later income years in accordance with the explanatory memorandum (EM) to the Bill that added the discretion to section 118-195 of the ITAA 1997, (the Tax Laws Amendment (2011 Measures No 9) Bill 2011).

This enables a trustee or beneficiary of a deceased estate to apply to the Commissioner to grant an extension of the 2-year time period to dispose of the deceased's dwelling, where the CGT event happens in the 2008-09 income year or later income years.

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. This discretion may be exercised 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); or

•                     the 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 but provide guidance on what factors the Commissioner would consider reasonable to exercise his discretion to extend the 2-year period to dispose of an inherited dwelling.

In exercising the discretion, the Commissioner will also consider how long the trustee or beneficiary held the ownership interest in the dwelling and the extent to which the dwelling has been used for other purposes, such as:

•                     producing assessable income

•                     a main residence for a beneficiary or associates of the beneficiaries

•                     renovations or other activities designed to increase the sale price, or

•                     waiting for the property market to improve.

Whether the Commissioner will exercise his discretion under subsection 118-195(1) of the ITAA 1997 will depend on the facts of each case.

Application to your situation

We have taken the following into consideration when making our decision:

•                     The deceased passed away.

•                     The dwelling passed to you and your sibling as beneficiaries of the deceased's estate each owning a 50% share of the dwelling as tenants in common.

•                     You allowed your sibling to move into the dwelling after the passing of the deceased, this was a choice you had made. PCG 2019/5 provides an example similar to your situation where an individual was allowed to reside in the deceased dwelling after their death but did not sell the dwelling within the 2-year period.

•                     The deceased's will did not contain any provisions for a life interest or life tenancy agreement for your sibling.

•                     You decided to move and persuaded your sibling to buy your 50% ownership interest in the dwelling.

•                     The delay in the disposal of the property was not due to any legal impediment, but as a result of the actions and choices of the beneficiaries of the deceased's estate.

•                     The information provided by you does not support that the deceased's estate was of a complex nature. Therefore, this is not a factor that the Commissioner would take into consideration when making the decision on whether or not to exercise his discretion to extend the 2-year period to dispose of the property

•                     As a result of choices and actions made by the beneficiaries of the deceased estate, the disposal of the dwelling did not occur until over X years after the deceased had passed away.

•                     No action was taken by you to remove your sibling from the property in order to sell the property in a timely manner.

Conclusion

The intention of the 2-year period is to allow the orderly and timely sale of the deceased's property while the Commissioner's discretion is meant to be limited to situations where the owner/s are effectively prevented from selling the property due to unforeseen delays.

A decision was made by the beneficiaries of the deceased's estate to allow one of the beneficiaries, (being your sibling), to reside in the dwelling after the death of the deceased.

The deceased's will gave you and your sibling ownership of the dwelling, however it did not give either of you a life interest or right to reside/occupy the dwelling.

While we accept that there where issues with your sibling, activities could have been undertaken to ensure that the dwelling had been disposed of within the 2-year period after the deceased had passed away.

The period of time from the date the deceased passed away until the dwelling was sold was over X and a half years. This is considered to be a significant period of time to dispose of an inherited property.

From the time the dwelling was transferred out of the deceased's estate you took no action to remove your sibling from the property within the 2-year period in order to sell the property in a timely manner.

The Commissioner considers that there were no legal or physical impediments that prevented the disposal of the dwelling within the 2-year period from the date the deceased passed away.

The delay in the disposal of the dwelling was caused by the actions and choices of the beneficiaries of the deceased's estate.

After taking into consideration the facts of your situation, the Commissioner has determined that he will not exercise his discretion to extend the 2-year period to dispose of your ownership interest in the properties.

As the Commissioner has not exercised his discretion to extend the 2-year period to dispose of the deceased's inherited property, any capital gain or capital loss made on your share on disposal of the deceased's inherited property cannot be disregarded.

Further information to consider

CGT discount

As you are an individual, you disposed of the dwelling after 21 September 1999, you held the property for at least 12 months, and provided you do not calculate your cost base with reference to indexation, any capital gain made on the disposal of each property is a discount capital gain. This means you are entitled to reduce the capital gain by 50% when working out your net capital gain.

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

Example 2 - No Safe Harbour - Family Member Residing in Dwelling

25. Ms Evans lived with Bevan (her adult son and full-time carer) in her main residence until she died on 1 September 2013. The dwelling was acquired after 20 September 1985 and was not being used to produce assessable income

26. On the basis the dwelling would still be sold and settled within a 2-year period, the trustee of the estate allowed Bevan to continue to live in the dwelling until he found full-time employment. Bevan was not given any right to occupy the house under Ms Evans' will.

27. In June 2016, Bevan obtained full-time employment and moved out of the dwelling. The trustee then sold the dwelling.

28. Because the delay in selling the dwelling was not caused by any of the circumstances described as favourable factors, the trustee cannot rely on the safe harbour. The decision to allow Bevan to reside in the dwelling was a matter of choice within the control of the trustee.