Edited version of private advice

Authorisation Number: 1052136238707

Date of advice: 14 July 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

No.

This ruling applies for the following periods:

Income year ended 30 June 20XX.

Income year ended 30 June 20XX.

Income year ended 30 June 20XX.

Income year ended 30 June 20XX.

Income year ended 30 June 20XX.

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away in 20XX.

Under the Will, beneficiaries are the three adult children

One of the children of the deceased was an executor (Trustee) of the estate.

The probate was granted in 20XX.

At the date of death, the deceased owned a property (the Property). The Property was:

• acquired before 1985 and is less than 2 hectares;
• the main residence of the deceased until her date of death;
• after the deceased's death, vacant and the deceased's family sorted the content in the house and prepared the Property for sale;
• from 20XX, rented to a child of one of the beneficiary, and grandchild of the deceased, (the Tenant), as a result of their circumstances;

All the Trustees and the beneficiaries acquiesced to renting the Property to the Tenant and family, to provide them with an accommodation and help them with their circumstances.

The rent money received from the Tenant has been deposited into the bank account for the estate. Some of these funds were used for outgoings towards the Property maintenance.

The rent will be declared in the income tax return for the estate on the completion of the house sale.

The Tenant after living in the Property for 12 months, discussed with the Trustee of the estate, the possibilities to purchase the Property once they receive some funds upon completion of court proceedings.

No steps were taken to sell the Property.

COVID-19 impacted the funds settlement of the tenant.

The Trustee and the beneficiaries to the estate commenced valuation of the Property after the Tenant received their funds in 20XX.

The Property was sold to the Tenant in 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

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

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

Reasons for decision

Summary

The Commissioner will not exercise his discretion under section 118-195 and allow an extension of time to the two-year period relating to the disposal of the Property. You are not exempt from tax on any capital gain made on the disposal of the Property pursuant to section 118-195.

Detailed reasoning

Subsection 118-195(1) provides that a capital gain or capital loss made on a dwelling acquired from a deceased estate may be 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 property was acquired by the deceased before 20 September 1985; and
  • your ownership interest ends within 2 years of the deceased's death or within a longer period allowed by the Commissioner
• the deceased was not an excluded foreign resident just before the deceased's death.

In other words, the Commissioner has discretion to extend the 2-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 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 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.

Paragraph 14 of PCG 2019/5 explains we weigh up all of the factors (both favourable and adverse). Whether the Commissioner will exercise his discretion under subsection 118-195(1) will depend on the facts of each case.

Application to your situation

In your case, we have considered all the facts. The delay in the administration of the deceased estate caused by the decisions made by the Trustees and the beneficiaries of the estate. We have considered the following facts:

•         COVID-19 lockdown that impacted Tenant' hearing dates of court proceedings;

•         the Trustees and beneficiaries acquiesced to renting the Property to the Tenant. The decision was made to:

o   help the Tenant with their circumstances;

o   provide the Tenant and the family with an accommodation;

o   agree to the Tenant's wish to purchase the Property;

o   agree to wait till the Tenant received settlement funds from the court proceedings;

o   sell the Property when Tenant received settlement funds;

The Will did not provide the Tenant with a legal right to reside in the Property. There was:

•         a period of several months from the date of death of the deceased until the Tenant advised the Trustee and the beneficiaries of their intention to purchase the Property;

•         a period of further delay of several months from the date of death of the deceased till the Tenant's court proceedings settled;

•         a period of several years from the date of death of the deceased before the Trustee and beneficiaries sold the property;

There were significant periods of inactivity in attending to the sale of the Property that was not out of control of the Trustee and the beneficiaries when they allowed the Tenant to remain in the Property.

Paragraph 13 of PCG 2019/5 outlines factors that cannot be material to delays in the disposal of the Property. Amongst these factors are inconvenience on the part of the trustee or beneficiary to organise the sale of the dwelling. The most significant factor in delaying the sale of the Property was the decision of the Trustee and the beneficiaries to wait for the Tenant's issues to be resolved, such as the Tenant going through the court proceedings and uncertainty of the outcome of the process and proceeds, was a matter of choice made by the Trustee and the beneficiaries. You have not considered placing the Property on the market after the passing of the deceased.

Having considered the relevant facts, the Commissioner's discretion will not be exercised under subsection 118-195(1) to extend the 2 year period. It is viewed that the facts of this situation are not of a nature that would be acceptable for the exercising of the Commissioner's discretion.

As the Commissioner has not exercised his discretion to extend the 2 year period to dispose of the Property, the capital gains tax (CGT) rules will apply to the disposal of the Property. Any capital gain or capital loss made on the disposal of the Property cannot be disregarded.