Edited version of private advice

Authorisation Number: 1052071979709

Date of advice: 20 December 2022

Ruling

Subject: Commissioner's discretion - deceased estates

Question

Will the Commissioner exercise the discretion under section 118-195 of Income Tax Assessment Act 1997 to allow an extension of time for you to dispose of your ownership interest in the dwelling you owned as a trustee of a deceased estate and disregard the capital gain or capital loss you made on the disposal?

Answer

No.

This ruling applies for the following period:

The income year ended 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 after 20 September 1985 as sole beneficiary of their spouse's estate.

The deceased was the sole executor and beneficiary of their spouse's estate.

The deceased was granted probate of their spouse's will during their lifetime but did not take any steps to administer the estate.

The deceased did not transfer title of the property to themselves, neither as executor nor beneficiary of their spouse's estate, prior to their passing.

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

The property was the main residence of the deceased and their spouse until their respective deaths and was not used to produce assessable income before or after each of them passed away.

The property remained vacant from the deceased's date of death.

Probate of the deceased's will was granted to the deceased's three children (the executors).

The executors also became executors of the deceased's spouse's estate.

After the deceased's death and obtainment of probate, immediate steps were taken to sell the property.

There was disagreement between the executors as to various aspects of the administration of the deceased's estate, including the sale of the property.

The executors received an offer to purchase the property within the two years following the deceased's death, however rejected this offer based upon the purchase price.

The executors decided to appoint a new selling agent.

The new selling agent eventually refused to further market the property, due to the executors failing to agree upon offers received to purchase the property.

More than two years after the deceased's passing, two of the executors (the remaining executors) commenced proceedings to have the third executor removed in their capacity as executor of the deceased's estate.

The remaining executors received Orders to this effect.

After receiving the Orders, the remaining executors then took immediate steps to sell the property.

COVID-19 restrictions and COVID-19's impact on the property market impacted the sale of the property.

A contract to sell the property was entered into on DD/MM/YYYY and settled on DD/MM/YYYY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Section 118-195 of the ITAA 1997 provides a capital gains tax (CGT) exemption to beneficiaries and trustees where a CGT event happens to a dwelling they acquired from a deceased estate. Subsection 118-195(1) of the ITAA 1997 provides that a capital gain or loss in this circumstance will be disregarded if:

1.    the deceased acquired their ownership interest in the dwelling on or after 20 September 1985,

2.    the dwelling was the deceased's main residence just before they died,

3.    the dwelling was not then being used for the purpose of producing assessable income, and

4.    your ownership interest in the dwelling ends within two years of the deceased's death, or within a longer period allowed by the Commissioner.

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 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. 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.

The factors that the Commissioner will consider to be favourable are listed in paragraph 12 of PCG 2019/5 are 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, or

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

The factors that the Commissioner looks upon unfavourably in deciding whether or not to exercise the discretion are listed at paragraph 13 of PCG 2019/5 as follows:

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

•         waiting for refurbishment of the dwelling to improve the sale price

•         inconvenience on the part of the trustee or beneficiary to organise the sale of the dwelling, or

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

As stated above, for the Commissioner to exercise their discretion under section 118-195 of the ITAA 1997 favourably, PCG 2019/5 generally requires that circumstances exist that were outside the control of the executors. While we acknowledge that there were some complexities regarding the administration of the deceased's estate, the delays in estate administration were caused by disagreement between the executors, which we do not accept is a circumstance outside their control. The difficulty of the executors to agree on certain aspects of the estate's administration, however, did not prevent the property being listed for sale, as an agent was appointed and offers to purchase the property were received within two years of the deceased's passing.

You advised that, within the two years following the deceased's passing, the three executors refused an offer to purchase the property based upon the price offered. Delaying the sale of the property to obtain a better purchase price is not outside the executors' control, and is a factor we looked upon unfavourably in deciding not to exercise the discretion to extend the two-year period.

We understand that, to finalise administration of the deceased's estate, the remaining executors took steps to remove the third executor. However, this action was not taken until some time after the two-year period from the deceased's passing had elapsed. This is another factor we have looked upon unfavourably in deciding not to exercise the discretion to extend the two-year period.

You also cited COVID-19 restrictions and COVID-19's impact on the property market as a reason for the delay in disposing of the property. Although we accept that COVID-19 restrictions impacted the remaining executors' ability to dispose of the property eventually, COVID-19 restrictions did not prevent the executors from disposing of the property inside the two-year period from the deceased's passing.

For the reasons outlined above, the Commissioner will not exercised the discretion to extend the two-year period to dispose of a dwelling under section 118-195 of the ITAA 1997. Therefore, any capital gain made on the disposal of the property, from the date the deceased passed away until the property was disposed of, will be subject to tax. That is, the first element of the cost base of the property is its market value on the deceased's date of death. You are also entitled to the 50% CGT discount in relation to the property.