Edited version of private advice

Authorisation Number: 1052090279622

Date of advice: 23 February 2023

Ruling

Subject: Commissioner's discretion - deceased estate

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 period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased died on XX XXX 20XX.

The deceased owned and lived at the property.

The property was the deceased's main residence just before they died.

The property was never used to derive assessable income.

Probate was granted on XX XXX 20XX.

The property was less than 2 hectares.

The deceased provide the option for a beneficiary to purchase the property before it was placed on the open market.

The reason for the delay in selling the property is as follows:

•         The beneficiary always intended to take up the option to purchase the house.

•         They believe that under normal business conditions they would have been able to obtain the finance to purchase the property.

•         Natural events caused the beneficiary to take time in getting the finance and ultimately not be able to purchase the property.

The property settled on XX XXXX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 118-195(1)

Reasons for decision

The main residence exemption in section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to disregard a capital gain or capital loss a taxpayer makes from a capital gains tax (CGT) event that happens to a dwelling that is their main residence.

If a taxpayer inherits an ownership interest, subsection 118-195(1) of the ITAA 1997 applies so that any capital gain or capital loss they make from a CGT event that happens in relation to a dwelling or their ownership interest in a dwelling is disregarded if:

•         They are an individual and the interest passed to them as a beneficiary in a deceased estate, or they owned it as the trustee of a deceased estate; and

•         The deceased acquired the ownership interest 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

•         Their ownership interest ends within two years of the deceased's death, or within a longer period allowed by the Commissioner.

Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example:

•         The ownership of a dwelling or a will is challenged.

•         The complexity of a deceased estate delays the completion of administration of the estate.

•         A trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury).

•         Settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control.

Factors that would weigh against the granting of the discretion include:

•         Waiting for the property market to pick up before selling the dwelling.

•         Property used to earn assessable income.

•         Unexplained periods of inactivity by the executor in attending to the administration of the estate.

The above examples are not exhaustive.

In addition, once any circumstances preventing the sale of the Property have been resolved, the Property needs to be placed on the market as soon as possible to enable its disposal.

Application to your circumstances

The delay in selling the property was due to the deceased's beneficiary trying to save enough money to be able to purchase the property.

It took the deceased's beneficiary approximately X years to come to the realisation that they were not going to be able to save enough funds to be able to purchase the property.

The executors allowed the deceased's beneficiary to take the amount of time they did to attempt to purchase the property.

The issues that the deceased's beneficiary faced in terms of natural events would have affected all primary producers and were not unique to them and their circumstances.

While it would have been nice for the property to remain in the family the reality was the deceased's beneficiary was not in a position to purchase the property much earlier than the x years.

In this regard, we consider that the delay was not outside your control.

It is for the above reasons that you do not meet the requirements for the Commissioner to extend the 2-year time period as the property could have been sold at an earlier stage.

The Commissioner will not be exercising his discretion to extend the 2-year period for you to dispose of the Property. Therefore, any capital gain made on the property from the date the deceased passed away until the Property was disposed of will be subject to tax.