Edited version of private advice

Authorisation Number: 1052073107787

Date of advice: 21 December 2022

Ruling

Subject: CGT - Commissioner's discretion

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?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your relative (the Deceased) died.

You inherited a property with a dwelling (the Property) as part of the Deceased's estate.

The Deceased purchased the Property after 20 September 1985.

The land size of the Property is less than 2 hectares.

You applied for probate approximately 7 months after the date of death of the Deceased.

Probate was granted 2 weeks after application.

You have stated that the following work was done to the property before sale:

•         painting walls,

•         repairing holes in walls,

•         replacing broken windows,

•         stove replacement,

•         heater repair etc

You have stated that you performed some of the work yourself and other works were carried out by tradesmen.

You have stated that delays due to COVID-19 lockdowns and difficulties in sourcing supplies and tradesmen resulted in delays which prevented the property from being sold before the 2-year exemption from CGT expired.

There were 262 days of COVID lockdown over the relevant period of time.

The contract for sale was executed less than one month after the expiry of the two-year exemption from CGT.

Settlement of the Property occurred approximately 6 weeks after execution of the sale contract.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

A capital gain or capital loss may be disregarded where a capital gains tax event happens to a dwelling if you owned it as the trustee or beneficiary of the deceased estate.

For a dwelling acquired by the deceased after 19 September 1985, that was the deceased's main residence and not used to produce assessable income just before their death, you will be entitled to a full exemption if your ownership interest ends within 2 years of the deceased's death. Your ownership interest ends at the time of settlement of the contract of sale.

In your case, the deceased acquired the property after 19 September 1985. After the deceased passed away, you owned the property as trustee of the estate. The property was the deceased's main residence until just before they passed away and was not used to produce assessable income at that time.

The property sale settled more than 2 years after the deceased's death. Therefore, you require the Commissioner's discretion to extend the two-year period to be eligible for an exemption.

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 provides guidance on factors we consider when deciding whether to grant the discretion.

Paragraph 3 of PCG 2019/5 provides that we will allow a longer period where the dwelling could not be sold and settled within two years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first 2 years.

Paragraph 14 of PCG 2019/5 explains we weigh up all of the factors (both favourable and adverse). Paragraph 17 of PCG 2019/5 provides a list of other factors that may be relevant to the exercise of the Commissioner's discretion which includes the sensitivity of your personal circumstances.

In your case, it is noted that there was a significant period in which government restrictions on travel imposed due to the COVID-19 pandemic presented difficulties in attending to the property, however by your own admission the delays resulted in difficulties in sourcing building materials and tradesmen to refurbish the property to prepare it for sale, rather than preventing a sale from being achieved directly. PCG 2019/5 clarifies that we regard government restrictions on travel imposed due to the COVID-19 pandemic as a favourable factor only when they prevent real estate activities, such as open homes or auctions, from occurring.

We consider that the choice to carry out repairs and refurbishments to the property rather than sell it in the condition you acquired it is a reason which is within your control, therefore the Commissioner's discretion will not be granted on this basis.

Having considered the relevant facts, we will not apply the discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the two-year time limit. Therefore, the normal capital gains tax (CGT) rules will apply to the disposal of the property. You should note that the first element of your cost base for the property is its market value on the deceased's date of death. The cost of repairs can also be included in the cost base of the property. You are also entitled to the 50% CGT discount in relation to the property.