Edited version of private advice

Authorisation Number: 1052057940288

Date of advice: 31 January 2023

Ruling

Subject: Commissioner's discretion - 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 commenced on:

1 July 20XX

Relevant facts and circumstances

Before 1985, the deceased purchased the property.

The property was situated on less than two hectares of land and was never used for the purpose of producing assessable income.

The property was the deceased's main residence until they moved into an adjoining property (Property B).

The house on the property was destroyed by fire while the deceased was living in Property B.

Shortly after, the deceased passed away.

Shortly after, you started making enquiries to advertise the property with numerous agents.

You received a valuation at the time for both the property and Property B combined.

During your sales campaign, you entered into X real estate Form 6 engagements. You approached a total of XX real estate agents, and there were no periods where you had not engaged a real estate agent. The property was marketed as vacant land. On the advice of marketing agents, the property was generally marketed for sale by tender or, forsale by negotiation. You have advised the following reasons for experiencing difficulty selling the property:

•         Restricted access to the property off a busy main road.

•         Overland flow (flooding) risk and storm water drainage issues. The Council flagged these issues whenever a prospective buyer made enquiries to them about the property.

•         Zoned only for Medium Density Residential (MDR). Some prospective buyers had hoped to develop the property for commercial purposes.

•         Bank lending constraints. Australian Prudential Regulation Authority (APRA) introduced much tighter lending constraints on all Australian banks, with the aim of reducing residential mortgage lending risk across the Australian banking industry. Agents with whom you spoke early in your marketing campaign noted that this was having a significant impact on the market at that time. They explained the impact was felt for several years, at least until the lending constraints were relaxed by APRA.

•         After a short period, you had not received any offers for the property as a single site so you decided to consider options to sell with adjoining properties.

Early in your sales campaign, the beneficiaries spent several months to successfully to refute an interim Vegetation Protection Order (VPO) which was imposed on the property by the Council. The property was taken off the market while the beneficiaries prepared their appeal against the VPO declaration. A few months later, you received formal notification from the Council that the VPO was revoked.

Early in your sales campaign, you received an offer, only in conjunction with another adjoining property. The deal fell through, as the owner of the adjoining property declined the offer.

Shortly after, valuers inspected the property to provide a retrospective valuation. Based on the Direct Comparison Approach, they assessed the market value of the property on the date of the deceased's death. They also provided the current value of the property combined with Property B.

Shortly after, you declined 2 offers.

About a year later, you declined another offer for the property due to a long settlement period and no guarantee that the buyer would get approval for their Development Application (DA) from the Council. You were concerned you would be locked out of the market and unable to consider any other suitable offers for the duration of the full XX months of the contract.

During the next year, you observed a very flat market in a relatively quiet year. You left messages with numerous agents - mostly those with whom you had previous dealings - to contact you if they had any interested buyers, or expressions of interest. Agents advised that you probably wouldn't receive any serious interest in the property, and that you should simply hold out until surplus stock had been sold, or at least, was significantly reduced. You received no offers or expressions of interest during this time.

About a year later, you signed a Contract for Sale. The buyer was a joint venture with neighbouring allotments, including Property B. The contract fell through, as the buyer failed to get Development Approval from the Council (as notified at the pre-lodgement development application meeting). The stringent development requirements specified in the Council Plan did not allow for a proposed kindergarten for the site (which is zoned for MDR) only.

About a year later you declined 3 offers because the price was too low.

Shortly after, you signed a Contract for Sale. After a protracted Development Application period, the sale settled almost 4 years after the two-year period ended.

Assumption

As executor, on behalf of the deceased, you chose to continue to treat the property as the deceased's main residence when they moved into Property B.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-160

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

Summary

Most of the delay in disposing of the property was caused by the price you were willing to accept once it was on the market. Your choice to decline offers were decisions within your control. Therefore, as there was a significant period of delay that was not out of your control, we will not exercise the discretion to grant an extension of time.

Detailed reasoning

A capital gain or capital loss may be disregarded where a capital gains tax event happens to a property if you owned it as the trustee or beneficiary of the deceased estate.

You will be entitled to a full exemption for a property acquired by the deceased before 19 September 1985 and your ownership interest ends within two years of the deceased's death. If acquired after 19 September 1985, the property must have been the deceased's main residence and not used to produce assessable income just before their death. Your ownership interest ends at the time of settlement of the contract of sale.

We note the deceased moved out of the property but the absence rule in section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997) can be used to continue to treat the property as their main residence. After the dwelling on the property was destroyed, section 118-160 of ITAA 1997 allows them to continue to treat the property as their main residence even though there is no longer a dwelling on the land.

In your case, after the deceased passed away, you owned the property as executor of the estate. The deceased bought the property before 19 September 1985. However, the property sale settled more than 2 years after the deceased's death. Therefore, you require the Commissioner's discretion to extend the two-year period to be eligible for an exemption.

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 provides guidance on factors we consider when deciding whether to grant the discretion.

Paragraph 3 of PCG 2019/5 provides that we will allow a longer period where the dwelling could not be sold and 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.

Paragraph 14 of PCG 2019/5 explains we weigh up all of the factors (both favourable and adverse). Paragraph 17 of PCG 2019/5 provides a list of other factors that may be relevant to the exercise of the Commissioner's discretion.

In your case, we consider the following as favourable factors:

•         you engaged many real estate agents and actively marketed the property.

•         the property location, access to the property, zoning, and flooding risk presented challenges when marketing the property.

•         a Contract for sale fell through due to the buyer's development application being rejected.

•         the longer than usual settlement of the eventual sale.

We acknowledge the property location, access, zoning, and flooding risk presented challenges when trying to arrange its sale. Your comprehensive timeline provides an insight into your continual efforts to sell the property for a price you were willing to accept. We understand that the lengthy period of time to sell the property (5 years) was very distressing for you.

We consider the most significant factor that delayed the sale of the property during the first two years and subsequent years was the price you were willing to accept.

We also consider the following as adverse factors:

Choice of marketing

Throughout your sales campaign, the property was advertised inviting offers rather than a specific price. Your choice of marketing limited your strategies, such as lowering the price when you were experiencing difficulty selling. It also limited your market to those willing to express their interest without a specific price point. You chose not to adjust your strategy despite your difficulty in attracting offers.

Offers you declined

For the 5 years you had the property on the market you received a total of 8 offers (not including the eventual sale). The 5 offers which proceeded were not in the vicinity of your valuations. We consider these offers provide the best indication of what the market was willing to pay for the property at those times. From this, we can conclude that the valuations did not reflect the market value of the property considering its location, access, zoning, and flooding risk.

Your choice to decline these offers was a decision within your control. Further, there is nothing to indicate you negotiated with the prospective buyers nor does it appear you reassessed the market value after the initial offers.

No offers received for a period of 2 years

You chose to follow your agents' advice and wait for the market to pick up. This is an adverse factor listed in paragraph 13 of PCG 2019/5.

We consider the above adverse factors along with the long extension requested (almost 4 years) outweigh the favourable factors. Ultimately, your actions demonstrate your efforts to maximise the value received for the property rather than efforts to arrange the orderly sale of the property within the two-year time period allowed.

We have considered all your circumstances but, as there was a significant period of delay that was not out of your control, we will not exercise the discretion.

This means that the deceased's estate will be liable for tax on the capital gain made on the disposal of the property from the date of the deceased's passing. That is, the first element of the cost base of the property will be its market value at the date of death. You will be entitled to the 50% CGT discount in relation to the property.