Edited version of private advice

Authorisation Number: 1052070771932

Date of advice: 22 December 2022

Ruling

Subject:Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise his discretion under section 118-195 of the Income Tax Assessment Act 1997 to extend the two-year period until February 20XX to dispose of the deceased's ownership of interest of a dwelling up to 2 hectares?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

22 September 20XX

Relevant facts and circumstances

The deceased purchased the dwelling together with her sibling in 19XX.

The property is 182 m² in size.

The deceased and her sibling were tenants in common in equal share in the property.

The deceased's sibling passed away on the XX/XX/XXXX and left a 25% share of the total property (half of her 50% share) to the deceased, and the remaining 25% of the total property to an unrelated third party.

The estate of the deceased's sibling was not administered and the title to the additional 25% had not passed to the deceased prior to her death.

The deceased treated this property as their main residence until the date of their death.

The deceased died on XX/XX/XXXX.

At the time of her death, the sole living beneficiary of the deceased's will was her child. The executor named in the deceased's will was the NSW Trustee and Guardian.

The deceased's child was aware of the death of the deceased and attended to the upkeep of the property, until his death on the XX/XX/XXXX, but did not live in the property or use it to produce income.

During the period between XX/XX/XXXX and XX/XX/XXXX, the beneficiary of the deceased's will, did not act to locate the deceased's will or to notify the NSW Trustee and Guardian of the passing of the deceased.

During the period between the deceased's death and his death, the deceased's child suffered from a medical condition.

An affidavit of will search was signed in MM 20XX. Approximately four months after the death of the deceased.

Probate to the deceased's estate was granted on XX/XX/XXXX, just over five years after the deceased's date of death.

The NSW Trustee and Guardian was appointed as the executor of the estate as per the instructions of the deceased's will.

The property was sold in MM 20XX, 5yrs and 5 months after the deceased's date of death.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

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 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 existed for a sizeable portion 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.

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.

In this case it is noted that the period of time from the date of death of the deceased to the date of grant of probate to have exceeded five (5) years. In this regard, we consider that the executor has not provided adequate explanation for this period of inactivity in attending to the administration of the estate and as such is a mitigating factor against the granting of the discretion.

You have stated that the deceased's child and his family chose to upkeep the house but not to attend to the estate as they prioritised attending to the health concerns of the deceased's child. As the beneficiary of the estate, the deceased's child was not required to administer the estate, rather he was to benefit from the administration of the estate by the executor. As stated above, paragraph 13 of PCG 2019/05 states that inconvenience on the part of the trustee or beneficiary to organise the sale of the house is a factor that would weigh against exercising the discretion. It is not within the policy intent of the discretion to provide an extension beyond two years where the delay was caused by the beneficiary's inaction, and the delay prevented the executor from dealing with the estate.

In this regard, we understand that the deceased child's illness, his treatment, and his death were events outside of his control. However, the impact of his health on his ability to deal with the estate is only relevant in his limited capacity as a beneficiary and any obligation he held to inform the NSW Trustee and Guardian of the death of the deceased. We consider the choice to not notify the NSW Trustee and Guardian of the death of the deceased a mitigating factor against the granting of the discretion.

Although you were unable to exercise your duties as trustee for a number of years, due to being unaware of the deceased's death, this delay was caused by the sole beneficiary making no attempt to alert you to the death of his mother. We have considered all of the circumstances you have provided but, as there was a significant period of delay that could have been avoided had the sole beneficiary notified you of the death of the deceased, the Commissioner will not exercise his discretion to grant an extension of time.

Therefore, any capital gain made on the property from the date the deceased passed away until the property was disposed of will be subject to tax, however you may be entitled to a 50% discount on the CGT. You will need to consider when the deceased acquired the asset in order to apply the 50% discount. For the purposes of applying the 50% discount and for calculating the cost base for the capital gain, note that there are two separate assets for CGT purposes: 50% of the total property which the deceased obtained when she entered the purchase of the property as joint tenant with her sibling, and 25% of the total property left to the deceased in her sibling's will.