Edited version of private advice

Authorisation Number: 1052054088781

Date of advice: 17 November 2022

NOTICE

The private ruling on which this edited version is based has been overturned on objection.

This notice must not be taken to imply anything about the correctness of other edited versions.

Edited versions cannot be relied upon as precedent or used for determining how the ATO will apply the law in other cases.

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to the two year period to dispose of the inherited dwelling?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

XX March 20XX

Relevant facts and circumstances

In March 20XX You and your spouse, sold your family home.

Several months later You and your spouse moved into your parent's home (the Dwelling). You were their carer and living there made it easier for you to care for them.

On XX November 20XX You purchased a property close by (the New Dwelling). Settlement occurred, but you remined living in the Dwelling.

On XX March 20XX, your parent passed away (The Deceased).

You are joint Executor for the Deceased's estate, along with your sibling.

You are also joint beneficiary with your sibling.

After the Deceased passed away it was your intention to move into the New Dwelling. You had planned to get it painted and purchase new furniture, but the COVID pandemic interfered with the plans.

There were COVID lockdowns for the following dates in City A in 2020 and also 2021:

You could not engage a painter due to covid lockdown restrictions.

You could not arrange for a removalist due to the covid restrictions.

You remained living in the Dwelling because the New Dwelling was not ready.

At this time, you were also grieving the loss of the Deceased, and you found the tasks of moving home and cleaning out the Dwelling to be overwhelming.

On XX August 20XX your spouse was admitted to hospital regarding an illness.

Your spouse was discharged later that month but required assistance from the hospital at home. Their recuperation took another six weeks.

On XX November 20XX probate was granted by the Supreme Court.

There were COVID restrictions for XX days in total in 20XX as outlined above.

In 20XX, you had the interior of the New Dwelling painted, organised some minor renovations and repairs to be completed and ordered some new furniture (a bedroom suite, a television, a washing machine and a dryer).

You continued to clean out the Dwelling. This was hampered by your spouse's availability with work and time got away from You.

On XX January 20XX you and your spouse moved out of the Dwelling and continued the job of clearing it out.

On XX March 20XX you met with a real estate agent to discuss listing the Dwelling for sale by auction. Your sibling indicated during this meeting that they would buy you out.

On XX April 20XX your sibling required a second valuation, which was obtained on XX May 20XX.

On XX May 20XX your sibling withdrew their offer.

On XX June 20XX you contacted the real estate agent again and listed the Dwelling for auction.

On XX July 20XX you met with the agent (the next available time) to discuss the sale.

Shortly after, the Dwelling was advertised for sale.

On XX August 20XX a contract for sale of the Dwelling was signed, pending finance being approved for the purchaser.

On XX September 20XX the purchaser's finance was approved.

On XX October 20XX settlement occurred, two years and seven months after the Deceased's death.

You have made a capital gain upon the sale of the Dwelling.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

In certain circumstances, section 118-195 of the Income Tax Assessment Act 1997 (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.

An inherited property is exempt from capital gains tax (CGT) if you dispose of it within two years of the deceased's death, and either:

•         the deceased acquired the property before September 1985, or

•         at the time of death, the property was the main residence of the deceased and was not being used to produce income.

However, the Commissioner has the power under section 118-195 of the ITAA 1997 to extend the two-year period to dispose of an inherited property.

Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example:

•         the ownership of a property 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)

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

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

These examples are not exhaustive but provide guidance on what factors the Commissioner would consider reasonable to exercise his discretion to extend the two year period to dispose of an inherited dwelling.

In exercising the discretion, the Commissioner will also consider whether and to what extent the dwelling is used to produce assessable income, for how long the trustee or beneficiary held the ownership interest in the dwelling, the sensitivity of your personal circumstances and of other surviving relatives of the deceased

and the degree of difficulty in locating all beneficiaries required to prove the will.

Some factors that would be considered adverse to extending the two-year period include but are not limited to:

•         waiting for the property market to pick up before selling the dwelling

•         waiting for refurbishment of the dwelling to improve the sale price

•         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. In considering whether to extend the two-year period, we weigh up all of the factors (both favourable and adverse) having regard to the facts and circumstances of the case.

Application to your situation

In making our decision we have considered the time taken to grieve your loss, cleaning up the dwelling, packing up the deceased's belongings and obtaining probate. These events are all anticipated, and they are why we allow the two-year period. The health issues that your spouse experienced, also impacted on the period between XX and XX.

From March 20XX you did actively try to dispose of the Dwelling, engaging a real estate agent and entertaining an offer to purchase from your sibling, which was subsequently withdrawn. The Dwelling was listed for sale with an offer accepted and settlement occurring in October 20XX. However, these actions followed a period of 12 months of inactivity in relation to the sale (although the property itself was prepared for sale).

Once a Trustee has been appointed, they make choices as to how to proceed with the administering of the deceased's estate and the disposal of the dwelling within the two-year period, in order to be able to disregard any capital gain made on the disposal of the dwelling.

In this case the Commissioner has decided not to exercise his discretion to extend the two-year period available to the Trustee of the deceased estate to dispose of the inherited dwelling for the purposes of section 118-195 of the ITAA 1997.

After considering the facts of this situation, while we accept that there had been issues arising as a result of the COVID-19 pandemic, it is clear that the Commissioner's discretion is meant to be limited to situations where the owner is effectively prevented from selling the inherited dwelling.

The issues that have arisen as a result of COVID-19 were largely linked to the preparation and readiness of the New Dwelling prior to you moving into it, not your efforts to sell the Dwelling.

The delay in the disposal of the Dwelling was contributed to by your actions and choices. Activities could have been undertaken to ensure that the property had been disposed of within the two-year period after the Deceased had passed away.

We acknowledge and appreciate the circumstances in relation to the impact that COVID-19 had on the ability to get tradesmen to complete jobs in the New dwelling, and that the delivery of new furniture/whitegoods was much longer than would have occurred prior to COVID-19. We also acknowledge that the State's restrictions and lockdowns were more severe and frequent than other Australian states, but ultimately it was a decision you made to continue to reside in the Dwelling pending those jobs being completed at the New dwelling that contributed to the Dwelling not being sold within the two-year period after the deceased passed away.

The delay in the disposal of the Dwelling was not due to any legal or physical impediment or other factors outside your control, but as a result of the actions and choices you made.

Since the deceased passed away, you and your spouse used the Dwelling as your residence rather than organising to sell it in an orderly manner. You stayed in the Dwelling because the New Dwelling was not ready for you to move into.

Consequently, the Commissioner considers that there were no legal or physical impediments that prevented the disposal of the Dwelling within the two-year period from the date the deceased passed away.

Conclusion

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

As the Commissioner has not exercised his discretion to extend the two-year period to dispose of the inherited dwelling, any capital gain or capital loss made on the disposal of your ownership interest in the Dwelling cannot be disregarded and must be included in your 20XX-XX income tax return.