Edited version of private advice

Authorisation Number: 1052100488528

Date of advice: 22 March 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise the discretion under section 118-195 to allow an extension of time for you to dispose of your ownership interest in the property 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 owned a property that was acquired prior to 1985.

The deceased passed away in December 20XX.

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

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

Probate was granted in March 20XX.

The property was the childhood home of the deceased's daughters.

The daughters were also the beneficiaries of the deceased.

One of the deceased's daughters had resided at the property after returning home from overseas from 20XX until it was sold.

The deceased's will did not state that the daughter could remain in the property.

Although it had been discussed verbally, there was no written evidence to support that the daughter could continue to occupy the property after the deceased passed away.

In early 20XX, the beneficiaries contacted a real estate agent to enquire about selling the property.

The beneficiaries were advised by the real estate agent that the property was not in a saleable condition and that considerable work was required on the property for it to become saleable.

From 20XX, numerous maintenance and renovations were completed on the property. This work included a full roof restoration and engineering work to correct the foundations of the property. Two bathrooms as well as the laundry and kitchen were removed and replaced, and areas of the porch and outdoor areas were also repaired and replaced. Plumbing issues and electrical work were also completed. The property was fully painted both inside and outside and some asbestos present in the property was removed. Outdoor landscaping was undertaken, the outdoor sheds were fully renovated, and the driveways were repaired.

Australia experienced extreme bushfires and from September 20XX to March 20XX many areas of the state the property was in were on high alert.

The property was not far from bushland and work was undertaken to ensure that the property was bushfire safe.

The work undertaken to prepare the property for bushfires delayed the property renovations from being undertaken.

Smoke from nearby bushfires also made work on the property difficult at times.

In April 20XX, enquiries were made to a surveyor to determine if the property could be subdivided, however, this was not possible.

Covid-19 lockdowns between March 20XX and 25 May 20XX prevented the renovations from being completed and it was difficult to source materials and arrange consultations.

Further Covid-19 lockdowns in June 20XX to October 2XX further impacted the renovations from being completed.

Covid-19 lockdowns also impacted the arrival of items that were ordered for the property, including an oven and cooktop, a fridge and kitchen shelving.

Wet weather and flooding at times also prevented work from being completed on the property.

An additional real estate agent was contacted in July 20XX to discuss selling the property.

Although open homes commenced in October 20XX, the beneficiaries chose to list the property when open homes recommenced in January 20XX.

The property renovations were completed in late 20XX.

The beneficiaries acknowledged in a statutory declaration that they were aware that there was a designated time frame in which the property needed to be sold.

The beneficiaries also acknowledged that they wanted to find the right buyer to purchase the property.

A contract was entered into to sell the property in February 20XX with settlement occurring in April 20XX.

Relevant legislative provisions

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

Reasons for decision

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 by the deceased prior to 19 September 1985, that was the deceased's main residence, 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 prior to 19 September 1985. After the deceased passed away, you owned the property with your sister as beneficiaries. 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 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.

In your case, we consider as a favourable factor that the property was used as the deceased's main residence and was not used for income producing purposes.

We also considered that the disposal of the property was not a result of factors outside of the beneficiaries' control but as a result of the actions and choices of the beneficiaries to postpone the sale of the property until the maintenance and renovations had been completed.

Although Covid-19 lockdowns and the time taken to prepare the property for bushfires contributed to delays in maintaining and renovating the property, the property could have been sold in its current state unless a legal warrant was issued deeming the property unsafe. No such warrant has been provided.

There were no provisions in the deceased's will or other written evidence to suggest that your sister was permitted to remain in the property after the deceased passed away. In addition, there is no information to indicate there has been a challenge to the will, the estate was of a complex nature and that there were unforeseen or serious personal circumstances preventing the sale of the property.

Furthermore, you acknowledged that the property needed to be sold within a designated period and that you were looking for the right buyer to purchase the property. The PCG 2019/5 does not allow for waiting for a suitable buyer to purchase the property before it is sold.

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.