Edited version of private advice

Authorisation Number: 1052081472277

Date of advice: 2 February 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise the discretion under section 118-195 of the Income Tax Assessment Act 1997 to allow an extension of time for you to dispose of your ownership interest in the dwelling acquired from 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 year ending 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 on DD/MM/YYYY.

From the date of acquisition up until the deceased's date of death the property was occupied as the main residence of the deceased.

The deceased was the sole owner of the property.

One of the beneficiaries, the deceased's child lived at the property and cared for him in his later years.

In the will, the deceased appointed that child as one of the executors of the deceased estate and provided the right of occupation to her for the 10 year period upon the deceased's death.

This right to occupation ceased on DD/MM/YYYY.

The beneficiary continued to occupy the property as their main residence after this point.

The beneficiary had purchased a smaller adjoining property some years prior.

The adjoining property was always rented.

The adjoining property remained rented after the right to occupancy ceased.

The deceased estate was not listed for sale until MM/YYYY.

A contract for sale was executed on DD/MM/YYYY, with settlement occurring on DD/MM/YYYY.

Once the sale was settled the beneficiary moved into their own home that was acquired some years prior.

The primary reason for the delay in selling the property once the beneficiary's right of occupancy ceased was due to their personal health issues which were exacerbated by the onset of COVID-19 and the impact on the real estate industry in general.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the Trustees for the deceased estate.

This is to explain how we reached our decision. This is not part of the private ruling.

In certain circumstances, section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) provided that the trustee of a deceased estate may disregard a capital gain or loss made from the disposal of a property that passed to them in their capacity as trustee of a deceased estate if:

•         The property was acquired by the deceased 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 then being used for the purpose of producing assessable income; and

•         Your ownership interest ends within two years of the deceased's death.

Practical compliance Guidelines PCG 2019/5 the Commissioners discretion to extend the two-year period to dispose of the dwellings acquired from a deceased estate provides guidance on factors we consider when deciding whether to grant the discretion.

Paragraph 3 of the 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.

The factors the Commissioner will consider to be favourable are listed in paragraph 12 of the PCG 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 the administration of the estate;

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

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

In your case, we acknowledge that there was a right to occupy the property for a period of XX years which ceased in January 20XX.

You have referred to the beneficiary's personal health concerns and the onset of COVID-19 as the primary reason for the delay in selling the property, which was not listed for sale until MM/YYYY with settlement occurring on DD/MM/YYYY.

You advised that the beneficiary had purchased their own property some years prior to their interest ceasing that was an adjoining property to the deceased's estate.

The property was rented out during the beneficiary's right to occupy and remained rented when that right to occupy ceased.

We understand that the adjoining property was rented and due to COVID-19 restrictions, tenants could not be evicted and therefore, the beneficiary was unable to vacate the property and move into the adjoining property. However, it is our view that this should not have prevented the beneficiary from seeking alternative accommodation and listing the deceased estate for sale once the right to occupy had ceased.

Further to this, the beneficiary could have reviewed the tenancy agreement prior to the end of the right to occupy.

Given that the beneficiary was aware that their right to occupy was to cease, arrangements should have been made to dispose of the deceased estate from that point.

Based on the information provided, we consider the above factors to be an inconvenience on the part of the beneficiary and therefore weights against the Commissioner allowing a longer period to dispose of the property.

Another factor raised was the beneficiary's ongoing health concerns, and the impact that COVID-19 could have on those health issues. Arrangements could have been made for alternative accommodation as the interest ended early MM/YYYY. The first lockdowns were not experienced until the end of MM/YYYY.

We understand that the beneficiary was awaiting surgery, at this time which did not occur until MM/YYYY, however there was still a period of approximately one year before the property was listed for sale. This is a significant period before any attempts were made to sell the property and weighs against the Commissioner allowing a longer period to dispose of the property.

Ultimately when the deceased estate was sold and the beneficiary moved into the adjoining property, COVID-19 still existed and was an ongoing concern within society.

We acknowledge that COVID-19 impacted the real estate industry however given that the right to occupy ceased in MM/YYYY the beneficiaries would have had time to make arrangements for the sale of the property prior to the first lot of lockdowns experienced. Therefore, this factor is not relevant and does not support the Commissioner allowing a longer period to the two-year rule.

For the reasons above, we consider that the factors which were attributable to the delay in the disposal of the property were within the control of the beneficiary/executor of the estate.

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.