Edited version of private advice

Authorisation Number: 1052083426326

Date of advice: 15 February 2023

Ruling

Subject:Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise the discretion to allow an extension of time for you to dispose of your ownership interest in Property A and disregard the capital gain or capital loss you made on the disposal?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away sometime after 1985.

The deceased's main asset was Property A which the deceased acquired with their ex-spouse sometime before 1985 (pre-CGT).

Property A was the deceased's main residence and was not used for the purpose of producing assessable income just before they passed away.

Property A was situated on less than two hectares of land.

The deceased and their ex-spouse lived separately for several years before they legally separated sometime after 1985 (post CGT). After separating they agreed for the deceased to solely own Property A and their ex-spouse to solely own the adjoining property (Property B).

It was the deceased's express request, made to you (and other family members) shortly before their passing, that you not sell their home until such time as their ex-spouse had passed. This was out of concern that mobility and health issues may mean it would be wise for their ex-spouse to use Property A rather than Property B. This request was not declared in the deceased's will, but was expressed strongly to family members on a number of occasions.

After the deceased passed away, their ex-spouse moved into Property A because of their mobility issues.

In 20XX, the deceased's ex-spouse passed away.

Shortly after, you started making enquiries to advertise the property with numerous agents.

You received a Development Potential Report including a value estimate of both properties combined.

Over several years, you entered into many real estate Form 6 engagements. You approached many real estate agents, and there were no periods where you had not engaged a real estate agent. On the advice of marketing agents, Property A was generally marketed for sale by tender or, for sale by negotiation.

You have advised the main difficulty selling Property A was due to its location on a side street, close to a very busy, major intersection. Further, from your engagement with real estate agents, you concluded that Property B was not sellable by itself, primarily because of road-access issues. As the executors, you felt you had a responsibility to the estate beneficiaries (who were also the beneficiaries of the deceased's ex-spouse's estate); and it would have been negligent of you to promote the sale of Property A by itself.

After a short period, you had not received any offers for Property A or Property B as a single site, so you decided to consider options to sell with adjoining properties (including Property B).

Later, the beneficiaries spent several months to successfully refute an interim Vegetation Protection Order (VPO) which was imposed on Property A and Property B by the Council. Both properties were taken off the market while the beneficiaries prepared their appeal against the VPO declaration. Later, you received formal notification from the Council that the VPO was revoked.

Later, valuers inspected the property to provide the current value of both properties combined.

Shortly after, you received an expression of interest for Property A (only). They made no formal offer (timeframe seemed too tight for them, as they would require a very short settlement).

Later, you declined an offer for both properties combined.

Shortly after, you declined an offer for both properties combined.

Later, you engaged an agent to assess the rental potential of Property A, as the estate had run out of funds. The feedback was that it could not be rented in its current condition.

Shortly after, repair work was undertaken at the property.

After the repairs were completed, you started renting Property A to a tenant.

You observed a very flat market in a relatively quiet year. You left messages with numerous agents - mostly those with whom you had previous dealings - to contact you if they had any interested buyers, or expressions of interest. Agents advised that you probably wouldn't receive any serious interest in the property, and that you should simply hold out until surplus stock had been sold, or at least, was significantly reduced. You received no offers or expressions of interest during this time.

Later, you received one expression of interest for the property. However, they withdrew once they learnt of a recent update to parking requirements.

Later, you signed a Contract for Sale, which was a joint venture with neighbouring allotments, including Property B. The contract fell through, as the buyer failed to get Development Approval from the Council (as notified at the pre-lodgement development application meeting). The stringent development requirements specified in the Plan did not allow for the proposed development for the site which is zoned for medium density residential (MDR) only.

Later, you received several expressions of interest and declined 3 offers.

After this marketing campaign concluded, you were advised by an agent to consider selling as house allotments (rather than for a medium-density development). You declined, as local allotments were selling for much more than the amount the agent quoted.

Later, you signed a Contract for Sale, which was a joint venture with neighbouring allotments including Property B.

After a protracted Development Application period, the sale settled many years after the deceased passed away.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Question

Will the Commissioner exercise the discretion to allow an extension of time for you to dispose of your ownership interest in Property A and disregard the capital gain or capital loss you made on the disposal?

Summary

No, we will not exercise the discretion to grant an extension of time. It is arguable whether the initial period of delay when the deceased's ex-spouse lived in the property should be considered out of your control. But even if it was, an extension of time cannot be allowed as the subsequent period of delay of several years was not out of your control. The delay during this subsequent period was not out of your control as it resulted from your intent to maximise the value received for the property.

Detailed reasoning

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

You will be entitled to a full exemption for a property acquired by the deceased before 19 September 1985 and either of the following apply:

•                     your ownership interest ends within two years of the deceased's death; or

•                     from the time the deceased died, the property was used only as the main residence of at least one of the following people:

o        the spouse of the deceased immediately before their death (but not a spouse who was permanently separated from the deceased)

o        a person who has a right to occupy the property under the deceased's will

o        the beneficiary who disposed of the property.

If acquired after 19 September 1985, the property must have been the deceased's main residence and not used to produce assessable income just before their death. Your ownership interest ends at the time of settlement of the contract of sale.

In your case, after the deceased passed away, you owned Property A as executor of the estate. The deceased bought Property A jointly with their ex-spouse before 19 September 1985 (pre-CGT). They separated after 1985 (post-CGT) and agreed that the deceased solely own Property A. This means that the deceased acquired a 50% ownership interest after 19 September 1985. Property A was the deceased's main residence and not used to produce assessable income just before their death. However, the sale of Property A settled more than 2 years after the deceased's death and was not the main residence of one of the people listed above. 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 17 of PCG 2019/5 provides a list of other factors that may be relevant to the exercise of the Commissioner's discretion.

In your case, you have identified 2 distinct periods within your detailed timeline:

•         the period where the deceased's ex-spouse lived in Property A but did not have a right to occupy under the will. During this time, you made no attempts to sell the property.

•         the period where the property was available for sale until settlement.

Period where the deceased's ex-spouse lived in Property A

Paragraph 12 of PCG 2019/5 includes 'a life tenancy or other equitable interest given in the will delays the disposal of the dwelling' as a favourable factor. The West Australian Court of Appeal case of Caratti v Commissioner of State Revenue [2017] WASCA 128 (Caratti) considered this issue.

At paragraph [25]-[26] of its judgment, the Court of Appeal stated:

[25] ... Accordingly, attention is directed to the terms of the Will. The Will gives no right of residence to Mr Michael Caratti. He plainly has no such right under the terms of that instrument. Pre-testamentary arrangements of the kind referred to by the appellant are irrelevant to the application of s 22(b)(ii) of the Land Tax Act on its proper construction.

[26] Equally irrelevant is any post-testamentary decision by the appellant as trustee appointed under the Will to allow Mr Michael Caratti to reside at the Property. Insofar as it is alleged that Mr Michael Caratti has a right to reside at the Property pursuant to some agreement entered into with the appellant as trustee in the exercise of the appellant's powers under s 24 of the Trustees Act, the right (if it be a right) derives from the post-testamentary agreement, or, perhaps, from the appellant's exercise of a power under s 24 of the Trustees Act. It is not a right given by the terms of the Will, ie, a 'right under the will' given to 'an individual identified in the will' within the meaning of s 22(b)(ii) of the Land Tax Act.

The reasoning adopted by the Supreme Court and the Tribunal in Caratti seems to align with a narrow interpretation of what can be considered as "under" the terms of the will. That is to say that rights arising from pre-testamentary or post-testamentary agreements - where such rights are not expressly granted under the deceased's will to identified individuals - cannot be, properly construed, rights given "under" the will. Such rights often depend on the exercise of a discretionary power by the trustee and there is no duty or obligation on the trustee to grant those rights to the individual; therefore, the individual cannot be said to have a correlative right "under" the will.

The principles of Caratti equally apply to your circumstances. Although it was the deceased express wish before they passed, it was not declared in the will. Further, regardless of the land tax decision in your favour, our view is that the deceased's ex-spouse did not have a right to occupy under the will.

Paragraph 17 of PCG 2019/5 includes 'the sensitivity of your personal circumstances and of other surviving relatives of the deceased' in the list of other factors to consider in determining whether an extension should be allowed.

Although we understand your reasons for allowing the deceased's ex-spouse to live in the property due to their mobility issues, it is arguable whether these personal circumstances should be considered a favourable factor when examining this initial period of delay. This is because a case could be made that there was an alternative to them living in the property, that is, it could be argued that there was the option of arranging other suitable (without stairs) accommodation for them. In any case, even if we considered this initial period of delay was out of your control, the delay during the subsequent period of several years was not out of your control (see discussion below) and therefore an extension of time cannot be allowed.

Period where the house was available for sale until settlement

Your comprehensive timeline provides an insight into your continual efforts to sell Property A. We understand that the lengthy period of time to sell Property A was very distressing for you.

We consider the most significant factor that delayed the sale of Property A during the first two years after the deceased's ex-spouse's death and subsequent years was the price you were willing to accept.

We also consider the following as adverse factors:

Choice of marketing

Throughout your sales campaign, Property A was advertised inviting offers rather than a specific price. Your choice of marketing limited your strategies, such as lowering the price when you were experiencing difficulty selling. It also limited your market to those willing to express their interest without a specific price point. You chose not to adjust your strategy despite your difficulty in attracting offers.

Offers you declined

For the period you had Property A on the market you received several offers. The offers which proceeded were not in the vicinity of your valuations. We consider these offers provide the best indication of what the market was willing to pay for the property at those times. From this, we can conclude that the valuations did not reflect the market value of the property.

Your choice to decline these offers was a decision made within your control. Further, there is nothing to indicate you negotiated with the prospective buyers, nor does it appear you reassessed the market value after the initial offers.

No offers received for a period of 2 years

You chose to follow your agents' advice and wait for the market to pick up. This is an adverse factor listed in paragraph 13 of PCG 2019/5.

We consider the above adverse factors and the long extension requested outweigh any favourable factors. This is regardless of whether we consider the period the deceased's ex-spouse occupied the property as a circumstance out of your control.

Ultimately, your actions and decisions made during your sales campaign demonstrate your intent to maximise the value received for Property A, rather than arrange its orderly sale.

We have considered all your circumstances but, as there was a significant period of delay that was not out of your control, we will not exercise the discretion.

This means that the deceased's estate will be liable for tax on the capital gain made on the disposal of Property A from the date of the deceased's passing. That is, the first element of the cost base of the property will be its market value at the date of the deceased's death. You will be entitled to the 50% CGT discount in relation to the property.