Edited version of private advice

Authorisation Number: 1052063157680

Date of advice: 25 November 2022

Ruling

Subject: CGT - deceased estate

Question

Will the Commissioner allow an extension of time for you to dispose of your ownership interest in a dwelling and disregard the capital gain or loss you made on the disposal?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

1.             The deceased died in 20YY.

2.             The deceased acquired the Property before 20 September 1985.

3.             Following the death of the deceased 2 sets of proceedings were commenced by the deceased's family in respect of the validity of the Will pursuant to the relevant Act in that State.

4.             Final orders varying the terms of the deceased's Will were made by the Supreme Court. Under the orders made the Property was to be sold.

5.             Letters of Administration with the Will annexed were granted in 20YY, which was more than 2 years from the date of death of the deceased.

6.             Soon after a real estate agent was engaged to sell the Property.

7.             A contract for sale of the Property was signed in 20YY.

8.             Settlement of the Property occurred in 20YY.

9.             The Property was the main residence of the deceased and is less than 2 hectares.

10.          The Property has never been used to produce assessable income.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 118-195

Income Tax Assessment Act 1936 subsection 118-195(1)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise noted.

Question

Will the Commissioner allow an extension of time for you to dispose of your ownership interest in the Property and disregard the capital gain or loss you made on the disposal?

Summary

Since the Will was challenged, the sale of the deceased's main residence could not occur within 2 years of the death of the deceased. From the information provided, it is considered appropriate to extend the 2 year time limit to allow for the disposal of the deceased's main residence.

Detailed reasoning

1.            Section 118-195 provides a capital gains tax (CGT) exemption to beneficiaries and trustees where a CGT event happened to a dwelling they acquired from a deceased estate. Subsection 118-195(1) provides that a capital gain or loss in this circumstance will be disregarded if:

•                     the property was acquired by the deceased before 20 September 1985, and

•                     your ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner.

2.            In respect of the final dot point above, 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 the Commissioner will consider in determining whether or not to exercise his discretion to extend the 2 year period contained in subsection 118-195(1). Generally, the Commissioner will allow a longer period where the sale of the dwelling could not be settled within 2 years of the deceased's death due to reasons beyond your control.

3.            The factors that the Commissioner will consider to be favourable are listed in paragraph 12 of PCG 2019/5 as follows:

•                     the ownership of the dwelling, or the Will, is challenged,

•                     alife 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, or

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

4.            In your case, the Will of the deceased was challenged, with court orders not being finalised until 20YY. Letters of Administration of the Will were not granted until 20YY. As the deceased passed on DD MM YYYY, this meant that 2 years had already passed.

5.            Example 5 in PCG 2019/5 contains a scenario that is considered relevant to your case:

37. Mr Hawke acquired a dwelling before 20 September 1985, which was his main residence until he died on 3 October 2013. Mr Hawke's will stated that the dwelling was to pass (in equal shares) to his 2 adult children from his first marriage. The will also made separate provisions for both his first and second wives.

38. Both the first and second wives commenced legal proceedings to challenge the terms of the will. The children received legal advice that they could not dispose of the dwelling until those legal challenges had been resolved. Negotiations took place between all beneficiaries and a settlement was eventually reached, with Supreme Court orders handed down on 21 July 2015. In accordance with the order, the dwelling was to be disposed of and the proceeds distributed between the beneficiaries.

39. The dwelling was placed on the market on 1 September 2015 and sold, with settlement occurring on 16 November 2015.

40. The children could rely on the safe harbour because:

•                    the delay in disposing of the dwelling was due to legal challenges to the will (circumstances described as a favourable factor)

•                    the children clearly took positive steps to address these circumstances

•                    there were no materially adverse factors, and

•                    no more than an additional 18 months was required.

6.            Since the Will was challenged, in accordance with the factors listed at paragraph 12 and Example 5 of PCG 2019/5, it is appropriate to extend the 2 year time limit to dispose of the deceased's main residence. The Commissioner therefore allows the extension of time to the date the contract of sale was entered into, being DD MM YYYY.