Edited version of private advice

Authorisation Number: 1052127446797

Date of advice: 8 June 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise his discretion in item 1 in the table in subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the two-year period within which a dwelling must be sold to obtain a full main residence exemption?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX.

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away in 20XX.

The deceased was survived by several adult children.

The deceased left a Will appointing one of their children the sole executor of their estate (the Executor/Trustee). The deceased's Will divided the estate equally between the children (the beneficiaries).

The probate was granted of the deceased's Will to the named Executor.

The deceased:

• held several assets inclusive of their main residence;
• had several outstanding income tax returns and activity statements at the time of their death;
• their documentation was not in order;

The main residence (the Property):

• it was the deceased's main residence at date of death:

• it comprised of less than 2 hectares of land;
• it was never income producing from the initial acquisition date by the deceased to the sale settlement date;

Complexity that delayed the sale of the Property

• the executor spent several months with the accountants:
  • attending to deceased's tax obligations;
  • attending to other assets;
  • Covid-19, the executor faced travel restrictions/lockdowns as they were from a different state to where the deceased property was situated;

• after the date of death:
  • the beneficiaries of the deceased's estate had several disagreements and they could not agree on the settlement of the estate's assets;
  • some beneficiaries commenced legal proceedings in the Supreme Court of the State, seeking to revoke the original Grant of Probate and appointment of an independent administrator;
  • Supreme Court of the State appointed an independent Administrator;
  • letters of administration with the Will and Codicil annexed was granted to the Administrator;
  • failing to enter into a Deed of Family Arrangement or agree upon an extension of time to enter into a Deed of Family Arrangement, the Administrator was required by the Court's order to sell the Property.
  • the Property was sold by the Administrator.

Relevant legislative provisions

Income Tax Assessment Act 1997section 118-195

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

Reasons for decision

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997.

Summary

The Commissioner will exercise his discretion under subsection 118-195(1) and allow an extension of time to the two-year period for executors of the estate to dispose of the property.

Detailed reasoning

Subsection 118-195(1) states that a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if:

• you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and
• both of the following requirements are satisfied:
  • 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
  • your ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner; and
• the deceased was not an excluded foreign resident just before the deceased's death.

In other words, the Commissioner has discretion to extend the two-year time period in subsection 118-195(1) where the trustee or beneficiary of a deceased estate's ownership interest ends after two years from the deceased's death.

Practical Compliance Guideline PCG 2019/5 Capital gains tax and deceased estates - the Commissioner's discretion to extend the 2 year period to dispose of dwellings acquired from a deceased estate (PCG 2019/5) provides guidance on circumstances in which the Commissioner may exercise his discretion in extending the two-year period. It outlines a safe harbour compliance approach that allows taxpayers to manage their tax affairs as if the Commissioner had exercised the discretion to allow them a period longer than two years.

Paragraph 11 of the PCG 2019/5 outlines the conditions of the safe harbour compliance approach as follows:

Safe harbour - conditions

11. To qualify for the safe harbour, you must satisfy all of the following conditions:

•        during the first two years after the deceased's death, more than 12 months was spent addressing one or more of the circumstances described in paragraph 12 of this Guideline

•        the dwelling was listed for sale as soon as practically possible after those circumstances were resolved (and the sale was actively managed to completion)

•        the sale completed (settled) within 12 months of the dwelling being listed for sale

•        if any of the circumstances described in paragraph 13 of this Guideline were applicable, they were immaterial to the delay in disposing of your interest, and

•        the longer period for which you would otherwise need the discretion to be exercised is no more than 18 months.

Paragraph 12 of the PCG 2019/5 outlines the circumstances in which the Commissioner may exercise his discretion in extending the two-year period as they may take more than 12 months to resolve:

Circumstances that took more than 12 months to resolve

12. One or more of the following circumstances must have taken more than 12 months to address:

•        the ownership of the dwelling, or the will, is challenged

•        a life tenancy or other equitable interest given in the will delays the disposal of the dwelling

•        the complexity of the deceased estate delays the completion of 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.

Paragraph 13 of the PCG 2019/5 outlines the circumstances in which the Commissioner will not exercise his discretion in extending the two-year period as they cannot be material to delays in disposal of the dwelling:

Circumstances that cannot be material to delays in disposal

13. In order to qualify for the safe harbour, none of the following circumstances can have been material to the delay in disposing of your interest:

•        waiting for the property market to pick up before selling the dwelling

•        delay due to refurbishment of the dwelling to improve the sale price

•        inconvenience on the part of the trustee or beneficiary to organise the sale of the dwelling, or

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

Application to your circumstances

It is determined that the Trustees satisfy the conditions in paragraph 12 to qualify for the safe harbour approach because:

aspects that were material in affecting the timeliness of the Trustees' progress include:

•         the executor spent several months with the accountants attending to the deceased's tax obligations and other assets;

•         Covid - 19 restrictions/lockdowns;

•         several months after the date of death:

o   the beneficiaries had several disagreements and they could not agree on the settlement of the estate's assets, that resulted into legal proceedings in the Supreme Court;

o   Supreme Court of the State appointed an independent Administrator;

o   failing to enter into a Deed of Family Arrangement or agree upon an extension of time to enter into a Deed of Family Arrangement, the Administrator was required by the Court's order to sell the Property.

The combination of the above aspects had a significant impact on progress and each of the factors were clearly beyond the control of the Trustee and their combined impact applied for a significant portion of the two-year period. The Property was disposed by the Administrator, as ordered by the Supreme Court.

The Commissioner will exercise his discretion and grant the Trustees the extension of the two year period to dispose of the Property under subsection 118-195(1).