Edited version of private advice

Authorisation Number: 1052061287269

Date of advice: 22 November 2022

Ruling

Subject: CGT - 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 dwelling and disregard the capital gain or capital loss you made on the disposal?

Answer

No. Having considered your circumstances and the relevant factors the Commissioner will not allow an extension of time. Further information about the Commissioner's discretion can be found by searching ato.gov.au for 'QC 66057'.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

XX XXXX XXXX

Relevant facts and circumstances

The deceased passed away on XX XXXX XXXX.

The deceased acquired the property after 20 September 1985.

The property was the main residence of the deceased from XXXX 20XX to XX XXXX XX.

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

The deceased was not a foreign resident for tax purposes immediately prior to their death.

The property was never used for income producing purposes.

You met with a real estate agent to discuss sale of the property on XX XXXX 20XX after several phone discussions. You were advised by the real estate agent that selling the property in its current state would be difficult due to the property market where the property is located, the property should undergo repairs and renovations, and due to a backlog caused by COVID-19, work on the property would not commence until around 20XX.

The property underwent repairs and renovations from XX XXXX 20XX to XX XXXX 20XX. The property continued to be cleaned until XX XXXX 20XX.

The property was first listed on the market on XX XXXX 20XX

The property was sold on XX XXXX 20XX with settlement occurring on XX XXXX 20XX

The executors have asserted that the COVID-19 travel restrictions and the lockdowns that intermittently applied prevented or hindered the executors from travelling to the property to arrange repairs and renovations and facilitate the sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

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

For a dwelling acquired by the deceased after 19 September 1985, that was the deceased's main residence and not used to produce assessable income just before their death, you will be entitled to a full exemption if your ownership interest ends within two years of the deceased's death. Your ownership interest ends at the time of settlement of the contract of sale.

In your case, the deceased acquired the property after 19 September 1985. After the deceased passed away, you owned the property as trustee of the estate. The property was the deceased's main residence until just before they passed away and was not used to produce assessable income at that time.

The property sale settled more than two 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: Capital gain tax and deceased estates the Commissioner's discretion to extend the two-year period to dispose of dwellings acquired from a deceased estate (PCG 2019/5), provides guidance on factors we consider when deciding whether to grant the discretion.

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 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 two-year period (for example, the taxpayer or a family member has a severe illness or injury).
• Settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control.

Factors that would weigh against the granting of the discretion include:

• Waiting for the property market to pick up before selling the dwelling.
• Property used to earn assessable income.
• Unexplained periods of inactivity by the executor in attending to the administration of the estate.

The above examples are not exhaustive.

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 which includes the sensitivity of your personal circumstances.

In your case, whilst we acknowledge that the COVID-19 pandemic caused restrictions on travel and lockdowns, we do not consider this to be the dominant reason for the delay in the sale of the property.

We also considered the following factors:

•         the refurbishment of the property to improve the sale price either directly or partly through making the property match with the property market in the area;

•         the property was only listed for sale after refurbishment which was not necessary to facilitate the sale;

•         the period of inactivity from XX 20XX to XX 20XX in the administration of the estate in respect of the property.

Having considered the relevant facts, we will not apply the discretion under subsection 118- 195(1) of the ITAA 1997 to allow an extension to the two-year time limit because on balance, the adverse factors outweigh any favourable factors that exist. Therefore, the normal capital gains tax (CGT) rules will apply to the disposal of the property. You should note that the first element of your cost base for the property is its market value on the deceased's date of death. The cost of repairs can also be included in the cost base of the property. You are also entitled to the 50% CGT discount in relation to the property.