Edited version of private advice

Authorisation Number: 1052142493301

Date of advice: 26 July 2023

Ruling

Subject: Commissioner's discretion - deceased estates

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 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 20YY

The scheme commenced on:

XX/MM/CCYY

Relevant facts and circumstances

The deceased passed away on XX/MM/CCYY.

The deceased acquired the property before 20 September 1985.

The property was not used to produce assessable income.

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

The property was the main residence of the deceased and one of their adult children (child A).

Following the deceased's death, child A continued to use the property as their main residence. The other beneficiaries had an informal agreement to allow child A to continue living at the property in consideration for child A not making a claim against the deceased's estate. Child A paid council rates and insurance on the property but did not pay rent.

The deceased left a handwritten will in another language which was translated into English by a NAATI accredited translator on XX/MM/CCYY.

Child A passed away on XX/MM/CCYY.

Following Child A's death, the remaining beneficiaries signed a document titled 'Record of Informal agreement' on XX/MM/CCYY that detailed the informal agreement that had previously been made.

You received differing legal advice in relation to the validity of the translated will over the years. An affidavit as to the validity of the translated will was not produced until XX/MM/CCYY.

In the Affidavit of Executor provided with the application for probate, you stated that the reason for delay in proving the will was that child A occupied the deceased's property until child A's death.

Probate was granted on XX/MM/CCYY.

You entered into a contract to sell the property on XX/MM/CCYY with settlement occurring on XX/MM/CCYY.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

Summary

Having considered your circumstances and the relevant factors the Commissioner will not allow an extension of time.

Detailed reasoning

Extension of time

Subsection 118-195(1) of the ITAA 1997 states that if you owned a dwelling that passed to you as a beneficiary of a deceased estate or in your capacity as the trustee of a deceased estate, then you disregard any capital gain or loss made on the disposal of the property if:

•         the property was acquired by the deceased before 20 September 1985; or

•         the property was acquired by the deceased 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 (the Commissioner has discretion to extend this period in certain circumstances); or

•         the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of:

a)    the spouse of the deceased immediately before the death; or

b)    an individual who had a right to occupy the dwelling under the deceased's will; or

c)    if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary - that individual.

Your ownership interest ends at the time of settlement of the contract of sale.

In your case, the deceased acquired the property before 20 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.

A delay caused by a life tenancy or right to occupy given in the will is a favourable factor. However, Example 2 in PCG 2019/5 demonstrates that where a family member is not provided a life tenancy or right to occupy in the will but is permitted to reside in the dwelling by the trustee and beneficiaries then this is not a factor favourable to the granting of an extension of time. This is because it was the choice of the trustee and beneficiaries to allow the family member to reside in the dwelling rather than being a matter outside of their control.

Application to your circumstances

In your case, child A continued occupying the property as their main residence. There was no life interest or other equitable interest given to child A in the will. Rather, the other beneficiaries allowed child A to continue living in the property under an informal agreement.

A will may be varied by a Deed of Family Arrangement but for a Deed of Family Arrangement to be valid it needs to be signed by the trustee of the estate and all the beneficiaries entitled under the Will. The informal agreement in your case was a verbal agreement at the time it was made. The document later detailing the agreement was created more than a decade after the deceased's passing. Also, it was created after child A's death so was not signed by all the beneficiaries entitled under the will. The informal agreement in your case is not a valid Deed of Family Arrangement and therefore did not vary the will. Consequently, child A did not have a legal right to reside in the property; rather the beneficiaries decided to allow child A to continue living in the property. The Commissioner will not grant an extension of time in these circumstances as the decision to allow child A to continue living in the property was a matter of choice within the control of the trustees and beneficiaries.

We also considered the complications of proving the deceased's will written in another language. The deceased passed away on XX/MM/CCYY, that is, more than a decade ago. The will was translated into English by an accredited translator a few months after their death. The validity of the will in the other language was not produced until this year and probate granted a few months later. There was no reason provided for the delay in proving the validity of the will other than child A occupied the deceased's property and differing legal advice was received. Based on this information, the Commissioner will not grant an extension of more than a decade to prove the will.

In summary, the principal cause of delay was child A living in the property. They did not have a legal right to do so under the will or a valid Deed of Family Arrangement. As the decision to allow child A to live in the property was a choice by the trustee and beneficiaries rather than being a matter outside of their control, the Commissioner will not grant an extension of time.