Edited version of private advice

Authorisation Number: 1052090090892

Date of advice: 24 March 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 (ITAA 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:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away in 20XX.

The deceased acquired the property after 20 September 1985.

The property was the main residence of the deceased just before passed away and was not used to produce assessable income at that time.

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

The Will appointed executors of the estate.

Approximately X months after the death, executors attended to the obtaining information on assets and liabilities of the estate and attempting to locate the original Will.

In XXXX 20YY, Executors attend a meeting with the Registrar of Probate to lodge the application for Grant of Probate.

The Registrar was unable to accept the application as the original Will could not be produced. The Registrar suggested the executors instruct a legal practitioner to act on their behalf to apply for Probate due to the complexity of the application.

In XXXX 20YY, a legal practitioner was engaged.

In XXXX 20ZZ, the original Will was located and the legal practitioner received the original Will. However, the original Will had been marked.

The legal practitioner commenced investigations to identify who marked the Will and the reason.

In XXXX 20ZZ, a letter was sent to the person believed to have marked the Will and a draft affidavit was prepared setting out why Will was marked etc and the affidavit was executed in XXXX 20ZZ.

In XXXX 20ZZ, the executors lodged the application for Grant of Probate.

The probate was granted on XX XXXX 20ZZ.

The property was initially vacant.

The deceased's child moved into the property to take care of it.

The executors were aware when the child moved in; after probate was granted, beneficiaries requested that child to purchase the property.

The child despite many attempts was unable to secure finance.

On XX XXXX 20AA, the executors signed a Residential Sales Agency Agreement for the sale of the property.

In XXXX 20AA a rental agreement was entered into with the child which remained in place until the settlement.

The settlement date was XX XXXX 20AA.

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 (CGT) 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 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 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 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 2-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 which includes the sensitivity of your personal circumstances.

In your case, you contend that the reasons for the delay were:

1.    due to the complexity of the Probate application as described in the relevant facts above and

2.    due to one of the executors work commitment, it was inconvenient to arrange a mutually convenient appointment time for both executors to attend together at the Supreme Court Probate Office to meet with the Registrar of Probate; and

3.    inconvenient to arrange a mutually convenient appointment time for both executors to attend together to instruct lawyer and execute Probate documents.

However, we consider that you contested reasons in settling the estate are not beyond a reasonable person's control. If the executors were unable or unwilling to attend to their duties as executors of the estate in a timely manner; the executors should have declined the responsibility to ensure a speedy settlement of the estate.

We also considered the executors allowed the deceased's child to live in the property for a considerable period, after the probate was granted, instead of getting the property ready for sale, finding a buyer and fitting in a settlement period. The executors relied on the deceased's child who was asked by the beneficiaries to purchase the property. However, despite many attempts the child was unable to secure finance, which resulted in the sale of the property took place after the expiry of the 2-year period.

Having considered the relevant facts, we will not apply the discretion under section 118-195 of the ITAA 1997 to allow an extension to the two-year time limit. Therefore, the normal 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. You are also entitled to the 50% CGT discount in relation to the property.