Edited version of private advice

Authorisation Number: 1052058422903

Date of advice: 30 November 2022

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 until XX November 20XX to dispose of the dwelling at Address?

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 passed away on the XX January 20XX.

The deceased acquired the property at Place in September 20XX.

The property was the main dwelling of the deceased until the date of their death.

The property was situated on less than two hectares of land.

The property was not producing assessable income.

The deceased's last Will dated XX May 20XX appointed Person as Executor and Trustee of the deceased estate.

Probate was granted XX July 20XX, X months after the date of the deceased's death.

You were advised by your Solicitor Lawyers 1 that it was in your best interest to wait 12 months before attempting to sell your parent's property, because if the Will was challenged in the first 12 months period and if there were any costs you would be personally incur the costs.

You contend that from April 20XX to July 20XX with the restrictions of COVID-19 you were unable to clear the property to get it ready for sale due to you living in a different Local Government Area (LGA) to the deceased's property.

The residuary beneficiaries lived in State, and you contend that they were also unable to attend the property due to COVID-19 lockdowns.

In February 20XX you started to prepare the deceased's property for sale.

Negotiations with a developer also commenced but failed to amount to anything.

In June 20XX through to October 20XX you contend that COVID-19 lockdowns occurred again with border closures.

In October 20XX you changed Lawyers due to poor representation: the new lawyers were Lawyers 2.

Just prior to the 2-year anniversary there were negotiations with another potential buyer, but this sale fell through.

In February 20XX and June 20XX your personal property where you reside was affected and damaged by the floods.

In March 20XX you engaged the help of real estate agents.

In late March 20XX you slipped on a mossy path and broke your ankle and wrist and had very little mobility and were unable to drive until July 20XX.

On XX July 20XX a contract was exchanged for the purchase of the deceased's property with settlement occurring on the XX November 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

Detailed reasoning

Subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that if you own or you have an ownership interest in, a dwelling in your capacity as the trustee of a deceased estate (or it passed to you as a beneficiary of an estate), then you can disregard any capital gain (or loss) made on the disposal of the dwelling if:

•         the dwelling was acquired by the deceased before 20 September 1985, or

•         the dwelling 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 this period in certain circumstances).

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 the factors that the Commissioner will consider when determining whether or not to exercise the discretion to extend the two-year period under subsection 118-195(1) of the ITAA 1997. Generally, the Commissioner will allow a longer period where the sale of the dwelling could not be 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.

However, PCG 2019/5 provides that the following factors weigh against the Commissioner allowing a longer period:

•         You waited for the property market to pick up before selling the dwelling

•         Delay was caused to the disposal of the property due to refurbishment of the house to improve the sale price

•         Delay to disposal of the dwelling was caused as a result of inconvenience on the part of the trustee or beneficiary to organise sale of the dwelling, or

•         Delay was caused by unexplained periods of inactivity by the executor in attending to the administration of the estate.

Application to your circumstances

The deceased passed away on XX January 20XX. Two years from this date is XX January 20XX. As at XX January 20XX your ownership interest had not ended. The relevant capital gains tax (CGT) event, i.e. the disposal of the property which occurs upon settlement, did not occur until XX November 20XX, almost XX months after the expiration of the 2-year period. You contend that the delays were primarily due to the trustees and beneficiaries of the estate being impacted by the COVID19 pandemic lockdowns.

In applying the legislation to your circumstances in the view of the Commissioner of Taxation, there is no specific qualifying event or situation that occurred, outside of your control as trustee and trustee control, causing a delay in the sale of the deceased's interest in the property.

Whilst it is accepted that the COVID19 pandemic is a circumstance beyond your control, the decision to postpone the sale did not restrict your ability to start the process of getting the property ready for sale. Tasks to prepare the property were only undertaken just within the 2-year period. However, a significant portion of the work was commenced or completed too close to the expiration of the 2-year period to allow the sale to be completed within two years, or was not commenced or completed until after the 2-year period had expired.

Accordingly, the conclusion that can reasonably be drawn is that the delays in the sale of the property were due to choices you made regarding when you began preparing the property for sale, and were not due to circumstances beyond your control.

The Commissioner has not exercised the discretion to extend the two-year period to dispose of a dwelling under section 118-195 of the ITAA 1997. Therefore, any capital gain made on the property from the date the deceased passed away until the property is disposed of will be taxable. The first element of your cost base for the property will also be its market value on the deceased's date of death.