Edited version of private advice

Authorisation Number: 1052062321500

Date of advice: 28 November 2022

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 to allow an extension of time to the two-year period for you to dispose of the dwelling and disregard the capital gain or capital loss made on the 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

The deceased passed away on DD/MM/YYYY.

The deceased acquired the property as co-owner with their spouse.

The deceased's spouse died, and the property was transferred into their name as the sole owner of the property.

The property was the main residence of the deceased throughout their ownership period.

The property has never been used to produce assessable income.

The property is less than two hectares in size.

The deceased had three children, Child 1, Child 2 and Child 3 who are equal beneficiaries to the estate.

Child 1 moved into the property immediately after the deceased's death to care for child 3 who was a minor.

The deceased did not have a Will and Child 1 was appointed Administrator by a court on DD/MM/YYYY.

Child 1 was the sole trustee of the deceased's estate.

Child 1 remained at the property until its sale on DD/MM/YYYY.

Child 2 moved into the property in YYYY and occupied the property as their home until MM/YYYY so the property could be prepared for sale.

Child 3 moved out of the property in YYYY.

Child 1 sold the property in their name in their capacity as the trustee of the estate.

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 a capital 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 two years of the deceased's death.

Practical Compliance Guidelines PCG 2019/5 The Commissioner's discretion to extend the two-year period to dispose of the dwellings acquired from a deceased estate outlines the factors that the Commissioner will consider when determining whether or not to exercise their discretion to extend the two-year period under section 118-195 of the ITAA 1997.

The factors the Commissioner will consider to be favourable are listed in paragraph 12 of the PCG as follows:

•         the ownership of the 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 the deceased estate delays the completion of administration of the estate;

•         settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of your control; or

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

Also, in determining whether it is appropriate to allow an extension to the two-year period, we must take into account the purpose of the two-year period. Previously the period allowed for the disposal of a deceased's dwelling was 12 months. Chapter 5 of the Supplementary Explanatory Memorandum to the Taxation Laws Amendment Bill (No.3) 1997 explains that the reason for the change in the law to extend the period allowed from 12 months to two years was to give beneficiaries and trustees more time to arrange the orderly sale of the property.

In your case, we acknowledge that the deceased did not leave a will on their passing in YYYY and this would have led to some additional time in administering their estate. However, this factor does not account for the bulk of the delay in the sale of the property. Rather, the reason for the delay was the trustee moving into the property to live with their younger sibling who was a minor at the time of the deceased's passing. It is understandable why they made the decision rather than selling the property and procuring alternative accommodation for them and their sibling. Nevertheless, it was possible for them to have sold the property at some time before it was eventually sold in YYYY, distribute the proceeds to all the beneficiaries including their other sibling, and find alternative accommodation for them and their younger sibling.

It is clear that the Commissioner's discretion is meant to be limited to situations where it was not possible for the trustee or beneficiaries to sell the property before the time it was actually sold. The intention of the two-year period is to allow the orderly and timely sale of deceased estate property. Although there will be circumstances in which it is understandable why the trustee or beneficiaries may decide to retain the property rather than selling it, this remains a choice and therefore in these circumstances an extension of time will not be granted.

As it was possible for them to have chosen to sell the property at some point before it was eventually sold on DD/MM/YYYY, we will not allow an extension to the two-year time period in this case.

Therefore, the normal capital gains tax (CGT) rules will apply to the disposal of the property. The first element of the cost base for the property is its market value on the deceased's date of death. The 50% CGT discount will also apply to the disposal of the property.