Edited version of private advice

Authorisation Number: 1052063233736

Date of advice: 8 December 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) to extend the two-year capital gains tax (CGT) exemption to dispose of the property at XXXXXXXX State XX?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your parent died.

You are the executors of the estate as well as beneficiaries of the will.

The deceased estate includes a dwelling.

Your parent inherited ownership of the property upon their spouse;s death which occurred more than XX years ago.

The property was the main residence of the deceased and was not being used to produce income at the time of their death.

The land size of the property is less than two hectares.

You applied for probate around 3 months after the date of death.

Probate was granted roughly 6 weeks after application.

The ownership interest in the property passed to you on the date at which probate was granted.

You prepared and filed notification of the deceased and the final tax return of the deceased later in that same year which probate was granted.

A third beneficiary in the deceased's will, Child C, continued to reside in the dwelling after her death.

The deceased's will did not provide Child C with any legal right to reside in the property.

Child C felt psychological distress at having to move out of the family home.

Child C also had difficulty finding an affordable rental property.

You have provided a letter from a real estate agency confirming that Child C unsuccessfully applied for three rental properties over a 26 month period starting roughly 2 months after the date of the deceased's death.

You have stated that Child C also applied for a number of other rental properties but have been unable to provide any documentation to confirm this.

Child secured a rental property after almost 2 years and 4 months had passed since the date of death of the deceased, and moved out of the dwelling 2 months after that.

Covid lockdowns occurred for some periods and you were prevented from accessing the property due to COVID due to the following circumstances:

•         Stay at home orders commenced on or about 24 March 2020 and went until on or about 8 May 2020. During this time, you were unable to travel the distance from your residences to the dwelling.

•         Lockdowns occurred on a number of occasions including, on or about 8 January 2021, 29 March 2021, 1 April 2021, 28 June 2021 and 31 July 2021, each for a period of more than 3 days. The total days under lockdown amounts to roughly 61 days.

•         On or about 16 January 20XX, 21 January 20XX, 9 April 20XX and 10 April 20XX, Executor A, or a family member residing at Executor A's residence, contracted COVID-19 which restricted Executor A from travelling to the dwelling.

The property was valued in an appraisal performed almost 2 years and 6 months after the date of the deceased's death.

The property was advertised for sale at that time.

The contract for the sale of the property was executed 2 years, 6 months and 2 weeks after the deceased's death.

Settlement of the property occurred 2 years, 8 months and 23 days after the date of the deceased's death.

The property sold for $XXX more than the value at which it was appraised.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 subsection 118-195(1)

Reasons for decision

Subsection 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss made on a dwelling acquired from a deceased estate may be disregarded if:

•         The property was acquired by the deceased estate 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 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 dwelling acquired from a deceased estate (PCG 2019/5) outlines the factors that the Commissioner will consider when determining whether to exercise his discretion to extend the two-year period under section 118-195 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 endured for longer than 12 months of the first two years and there are no significant factors that weigh against the allowing of an extension.

Factors that would weigh in favour of the Commissioner allowing a longer period include:

•         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; or

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

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

The absence of some or all of those favourable factors does not necessarily preclude us from allowing a longer period.

There are several factors that mitigate against the granting of the discretion. These include:

•         waiting for the property market to pick up before selling the dwelling;

•         delay due to refurbishment of the house to improve the sale price;

•         inconvenience on the part of the trustee or beneficiary to organise the sale of the house; or

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

PCG 2019/5 also states that the sensitivity of your personal circumstances and of other surviving relatives of the deceased may be relevant to the exercise of the Commissioner's discretion.

In considering whether to extend the two-year period all the factors both in favour and against the granting of the Commissioner's discretion must be considered.

Application to your circumstances

In your circumstance, it is apparent that the delay in selling the property was primarily due to the deceased's child Child C remaining in the property for longer than two years after the date of death. You have contended that Child C was unable to secure an alternative rental property until a point in time almost 2 years and 4 months after the deceased's death and that he suffered psychological distress at having to move out of the family home.

While it is recognised that there was some difficulty obtaining alternative accommodation for Child C, you were only able to provide evidence of three rental properties applied for in approximately two years, and the fact remains that the will did not provide them with a legal right to reside in the property. As such we consider that there were significant periods of inactivity in attending to the sale of the property while you allowed Child C to remain in the property.

It is also noted that government-imposed lockdowns due to COVID-19 had some impact in your ability to attend the property, however the guidelines in PCG 2019/5 state that it is specifically the restrictions on real estate activities caused by lockdowns which can be a favourable factor when evaluating the decision to grant the Commissioner's discretion. Over the dates of the lockdowns you have provided, no real estate activities were being undertaken to progress the sale of the property, therefore we do not consider this to be a significant factor in preventing you from achieving the sale within the two-year timeframe.

You have also stated that you and members of your family contracted COVID over a number of dates in early 20XX. As this occurred after the two-year exemption from CGT had already expired it will be disregarded from consideration.

As there were no other favourable factors delaying the sale of the property for a period of longer than 12 months, the Commissioner's discretion to extend the two-year period to dispose of the dwelling will not be granted and the main residence exemption from CGT cannot be applied to the sale of the property.