Edited version of private advice

Authorisation Number: 1052077935261

Date of advice: 23 January 2023

Ruling

Subject: CGT - deceased estate

Question

Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to the two-year period to dispose of the dwelling?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Deceased owned a property (the Property).

The Deceased passed away several years ago.

The Deceased acquired the Property prior to 20 September 1985.

The Property was always the Deceased's main residence.

There was a challenge to the will of the Deceased. A summons to court was issued to resolve the dispute between the parties.

A settlement was reached between the parties.

During the period of the legal challenge, the assets of the estate were frozen and prevented from being sold.

During a period of several months, time and energy was spent dealing with the executors and beneficiaries of the will.

For several months, you were unable to visit the property due to COVID restrictions.

For a period including those months, there was a general public lockdown in the city where the Property is located, requiring persons to stay at home except where they had a reasonable excuse to leave home.

Following the lockdown, you had difficulties finding and hiring people to undertake work to clean the Property due to people not working because of COVID or being busy after lockdown periods ceased.

Each weekend during that period, you and other family members began removing items that the deceased had been hoarding, cutting overgrown trees, and weeding the property to get it to a saleable condition.

Buyer interest in the property was low.

The purchaser of the Property also wished to purchase the adjoining property to enable them to build and develop on the block.

The purchaser requested a twelve-month settlement to enable them to have time to organise finance and be able to develop the Property and the adjoining property also. You agreed to the purchaser's request.

The Property was listed for sale.

Contracts were exchanged several months later.

Settlement took place the following year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Question

Summary

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 rules will apply to the disposal of the property.

Detailed reasoning

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 before 20 September 1985, you will be entitled to a full exemption if your ownership interest ends within two 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 before 20 September 1985. After the deceased passed away, the property passed to you as beneficiary. The property sale settled more than two 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 two years. Paragraph 14 of PCG 2019/5 explains we weigh up all of the factors (both favourable and adverse). Paragraph 17of 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

Application to your situation

In your case we consider the following as favourable factors:

•         challenge to the will which meant that no action could be taken regarding sale of the property for a period of several months

•         delays in obtaining workers to undertake tasks involved in cleaning up the property due to COVID restrictions and difficulty sourcing workers once lockdown period ceased

We also considered the following as unfavourable factors:

•         the long settlement period

•         once the challenge to the will was resolved, there was a period of almost twelve months until the property was first listed for sale.

Although the purchaser requested a long settlement to purchase the adjoining property and acquire finance, it was within your control to seek out other purchasers who would agree to a shorter settlement

Once any legal and physical impediments to sale have been removed, it is incumbent on you to put the property on the market as soon as possible.

Any extension to the two-year period needs to be due to reasons outside your control.

In this situation, the delays to the sale were within your control, including accepting a longer settlement period.

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 rules will apply to the disposal of the property.

You should note that the first element of your cost base for the property is the deceased's cost base on the deceased's date of death. You are also entitled to the 50% CGT discount in relation to the property.