Edited version of private advice

Authorisation Number: 1052039212049

Date of advice: 18 October 2022

Ruling

Subject: CGT - deceased estate

Question

Will the Commissioner exercise his discretion under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to the 2 year period for the disposal of the property by the Executors of the deceased estate and disregard any capital gain or loss they make on disposal?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

XXXX (the deceased) died on XXXX.

The deceased's Last Will and Testament dated XXXX (the Will) named child 1, XXXX and child 2, XXXX as the Executors and Trustees of the Will (Executors)

Probate was granted to the Executors on XXXX by the Supreme Court of XXXX.

The Statement of Assets and Liabilities for the deceased shows the main asset is a dwelling located at XXXX (the property) valued at $XXXX. The deceased resided at the property at the time of their death. The property was the deceased's main residence and was never used to produce income.

The deceased acquired the property after 20 September 1985.

The property is under 2 hectares in size.

The property was listed for sale around XXXX.

The property was vacant at the time between when the deceased passed away and the property was sold.

No major works were required to the property before it could be listed for sale just major clean-ups.

A contract for sale was entered into by the Executors of the deceased's estate on XXXX. The property was sold on XXXX for $XXXX and settlement occurred on XXXX.

The following circumstances have been listed as delays to the sale of the property:

•         Both XXXX and XXXX's spouse were experiencing life threatening medical issues.

•         Medical reports provided show XXXX was diagnosed with XXXX in XXXX and required extensive treatment was required. Medical reports confirm treatment was finalised in the XXXX calendar year.

•         General COVID-19 restrictions.

•         XXXX and XXXX's spouse being immunologically compromised and the increased threat of COVID-19 to them.

•         A change in the legal firm and staff assisting with the estate administration.

•         XXXX's spouse, provided the following comments:

o   A real estate agent was not contacted prior to the house being ready for sale

o   Grieving process

o   XXXX made redundant due to business closure as of XXXX which caused mental and financial stress and anxiety

o   Both executors live in XXXX, which is approximately a X hour drive each way to the property.

o   The house and sheds at the property were largely a hoarding situation all being full of items and paperwork collected over many years. These items required to be thoroughly sorted through so not to dispose of important paperwork and items containing personal details.

o   XXXX and their spouse, mostly travelled to the property overnight on a fortnightly basis where possible. During these visits, there was also substantial garden maintenance required.

o   XXXX held full time work positions and travelled to the property when able.

o   Family and other personal matters needing also to be dealt with during this time

o   Later, COVID-19 and restrictions

o   XXXX diagnosis and treatments and sickness due to side effects, surgery recovery time

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

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

Reasons for decision

In certain circumstances, section 118-195 of the ITAA 1997 provides that the trustee of a deceased estate may disregard an assessable gain or loss made from the disposal of a property that passed to them in their capacity as trustee of a deceased estate 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 2 years of the deceased's death.

The Commissioner has discretion to extend the 2year time period where the trustee or beneficiary of a deceased estate's ownership interest ends after 2 years from the deceased's death. Practical Compliance Guideline PCG 2019/5: The Commissioner's discretion to extend the two-year period to dispose of dwelling acquired from a deceased estate outlines the factors that the Commissioner will consider when determining whether to exercise his discretion to extend the 2 year period under section 118-195 of the ITAA 1997. This discretion may be exercised in situations such as where:

•         the ownership of a dwelling or the will is challenged

•         a life or other equitable interest given in the will delays the disposal of the dwelling

•         the complexity of a deceased estate delays the completion of administration of the estate

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

•         restrictions on real estate activities imposed by a government authority in response to the COVID-19 pandemic

These examples are not exhaustive. They provide guidance on what factors the Commissioner would consider reasonable to exercise his discretion to extend the 2 year period.

PCG 2019/5 also outlines factors that would weigh against the Commissioner allowing a longer period. Some factors include inconvenience on the part of the trustee or beneficiary to organise the sale of the dwelling or unexplained periods of inactivity by the executor in attending to the administration of the estate.

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

In this case the Commissioner has decided not to exercise his power to extend the 2 year period available to the trustee of the deceased estate to dispose of the property for the purposes of section 118-195 of the ITAA 1997. We have taken the following into consideration when making our decision:

•         The Commissioner expects an executor to undertake their duties to ensure that the estate is administered within an appropriate period.

•         We acknowledge the sensitivity of the personal circumstances with both XXXX and XXXX's spouse experiencing serious illness. We took into account the impact the illnesses may have had on preventing the executors from attending to the administration of the estate for a significant period. However the medical condition for XXXX was not diagnosed until XXXX, which was approximately XX months after probate had been granted.

•         Whilst many estates only have one executor, a replacement executor could have been appointed if the current executor/s were unable to attend to their duties of the deceased's estate.

•         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 executor/s of the deceased's estate.

•         The information and documentation provided 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. You have not provided information about how a change in the legal firm and staff assisting with the estate administration caused delays.

•         COVID-19 restrictions did not commence until XX months after probate had been granted and the first lockdowns were not enforced until XX months after probate had been granted. You have not shown that it was actually COVID-19 restrictions on real estate activities imposed by a government authority that caused the delay.

•         Unexplained periods of inactivity by the executors in attending to the administration of the estate.

•         Settlement on the disposal of the dwelling had not occurred until around XXXX after probate had been granted.

Conclusion

The Commissioner's discretion is meant to be limited to situations where the owner is effectively prevented from selling the property. The intention of the 2 year period is to allow the orderly and timely sale of deceased estate property.

We acknowledge and appreciate the difficult circumstances around the serious illness of the executor. We compared this situation against Example 7 in PCG 2019/5 (Paragraphs 45 To 47). In Example 7 there is one executor. Shortly after probate was granted, the executor was diagnosed with a serious illness and spent a large period of time hospitalised. As soon as the executor's health improved, the property was cleaned out and placed on the market. The period for which the discretion was needed was approximately 7 months.

In your situation there are X executors. One executor was diagnosed with a serious illness. Diagnosis did not occur until approximately X months after probate. A contract for the sale of the property was not entered into until approximately XX past the date of death of the deceased. The period for which the discretion is needed is approximately XX.

As limited information was provided, we cannot determine the Executors took steps to enable the property to be disposed of within the 2 year period after the deceased passed away.

We have determined that the Commissioner's discretion will not be exercised to extend the 2 year period. It is viewed that the facts of this situation are not of a nature that would be acceptable for the exercising of the Commissioner's discretion.

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