Edited version of private advice

Authorisation Number: 1052144181500

Date of advice: 20 July 2023

Ruling

Subject: CGT - deceased estate

Question

Will the Commissioner exercise the discretion in section 118-195 of the Income Tax Assessment Act 1997 to allow an extension of time for you to dispose of your ownership interest in the dwelling and disregard any capital gain or capital loss you made on the disposal?

Answer

No.

This ruling applies for the following period:

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away on XX XX 2020.

The deceased acquired ownership of the property prior to 20 September 1985.

The property is less than 2 hectares.

The property was the deceased's main residence until they moved to a nursing home on XX XX 20XX.

The Property was not the main residence of either a spouse of the deceased, or a beneficiary under the will, or someone who had a right to occupy the property.

The Property was used to produce income from XX XX 20XX to XX XX 20XX as short-stay accommodation and was occupied by you, one of the beneficiaries, on occasions throughout this period up until XX XX 20XX.

The Property was first listed for sale on XX XX 20XX prior to Probate being granted. Legal advice advised that a contract for sale could be entered with the proviso that the vendors are listed as executors of the estate of the deceased and that settlement did not occur until after a grant of probate.

The Property was listed for public auction for XX XX 20XX. However, no bidders registered, and the auction was cancelled. The Property was offered by the same real estate agent by 'best offer' to XX XX 20XX, with no offers received. The property continued to be listed for sale.

From XX XX 20XX, COVID-19 restrictions came into effect that included restrictions on open home inspections and public auctions. Viewings by appointment and digital sales were permitted during this time. Feedback from the real estate agent managing the listing advised there was a lack of interest in the Property and recommended a reduction in the advertised sale price. At this time, you advised that you wished to start renting out the property again (the Property did not end up being rented out again). Restrictions on real estate sales were removed from XX XX 20XX.

From XX XX to XX XX, you and family members undertook cleaning, minor landscaping, painting of gutters, window surrounds - inside and out, and replaced facia boards on the Property.

Probate was granted on XX XX 20XX.

Title of the Property was transferred to the beneficiaries on XX XX 20XX.

From XX 20XX to XX 20XX, you and family members undertook repairs to the Property including: repair and replacement of verandah timbers due to storm damage, some outside painting, cornice repair, repair to sprinkler system, powder coating and repair of outdoor metal fixtures, installation of pergola panel, garden improvements and maintenance. The majority of the work undertaken was not related to the storm damage.

There was dispute between the beneficiaries as to whether or not the Property should be sold. On XX XX 20XX the other beneficiary, your sibling, corresponded to you regarding progress on the disposal of the Property. On XX XX 20XX they corresponded to you seeking an expedition in the sale of the Property and an intention to apply for orders for the sale of the Property. On XX XX 20XX they corresponded proposing a resolution to the disposal of the Property and settlement of administration of the estate.

From XX XX 20XX to XX XX, you and family members packed household items and furniture for removal.

In XX 20XX the beneficiaries agreed to sell the Property.

In XX 20XX the Property was listed with a new real estate agent. A contract for sale was signed on XX XX 20XX and settlement occurred on XX XX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

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.

Under section 118-195 of the ITAA 1997 you are taken to have acquired your ownership interest in the property on the date the deceased passed away.

If you dispose of an ownership interest in a dwelling that passed to you as an individual beneficiary or as the trustee of the deceased's estate within 2 years of the deceased's death, any capital gain or loss you make on the disposal is disregarded. The Commissioner has the discretion to extend the 2-year period.

Generally, we will allow a longer period where the dwelling could not be sold and settled within 2 years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first 2 years.

Factors that would weigh in favour of allowing an extension include the following:

•                     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.

Factors that would weigh against allowing an extension include the following:

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

•                     waiting for 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.

In considering whether to extend the 2-year period, we weigh up all of the factors (both favourable and adverse) having regard to the facts and circumstances of the case.

The Property sale settled more than 2 years after the deceased's death. Therefore, you require the Commissioner's discretion to extend the 2-year period to be eligible for an exemption.

Although there was a dispute between the beneficiaries, it did not concern ownership of the Property, or a challenge of the deceased's will. Rather it is noted that the other beneficiary was trying to get you to expedite the sale of the Property. There is nothing in the information provided to indicate that the other beneficiary's actions in the dispute prevented you from having the Property sold.

There was no life tenancy or other equitable interest provided in the deceased's will.

The estate finalisation was not complex as evidenced by the Property being listed for sale immediately after the deceased's death.

Although restrictions on real estate activities occurred, they only limited open house inspections and public auctions for a period of two months, and they did not prevent the listing of the Property for sale.

The time taken to work on the Property contributed to the delay in its sale. Although, time taken to repair storm damage that occurs after the deceased's death would usually be a factor favourable to allowing an extension, it was not stated when the storm damage to the Property occurred. In any case, the majority of the work done to the Property was not related to the storm damage. Work done to improve the condition of the Property from what it was at the time of the deceased's death is a factor that weighs against allowing an extension of time. This is not a factor that was out of your control as the Property could have been sold in its current state.

The sale of the Property was not delayed due to reasons outside of your control but as a result of your actions and choices. When you were advised that the property price was too high compared to the market value, you did not reduce your asking price. Also, you postponed the sale of the Property until the maintenance and renovations had been completed.

In addition, there is no information to indicate there has been a challenge to the will, the estate was not of a complex nature and that there were no unforeseen or serious personal circumstances preventing the sale of the Property.

Having considered the relevant facts, the Commissioner will not apply the discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the 2-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 the 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.