Edited version of private advice

Authorisation Number: 1052148714827

Date of advice: 2 August 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner allow an extension of time for you to dispose of your ownership interest in the dwelling and disregard the capital gain you make on the disposal?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX.

The scheme commences on

1 July 20XX.

Relevant facts

The deceased (person A) acquired a dwelling prior to 20 September 1985 (the dwelling).

The deceased passed away on XX XX 20XX.

Title to the dwelling passed to the spouse of person A, person B.

Person B (the deceased) passed away on XX XX 20XX.

You provided a copy of the deceased's will.

The dwelling was the deceased's main residence and was located on land 2 hectares in size.

The dwelling was not used to produce assessable income prior to the deceased's death.

The dwelling was occupied by the deceased's child from 20XX until the dwelling was sold. The dwelling was never leased to tenants.

The deceased's children were named as joint executors of the deceased's estate

The joint executors were the beneficiaries of the estate.

Title to the dwelling was transferred to the beneficiaries on XX XX 20XX.

The beneficiaries engaged a real estate agent a short time later who specialises in selling large blocks of land including those likely to interest property developers.

The dwelling was listed for sale with an adjoining property. The combined size of the land is more than 2 hectares.

The marketing strategy was targeted to developers and no asking price was listed. The strategy was for expressions of interest to be provided.

You did not list the dwelling for sale separately.

You received an offer on XX XX 20XX of $X. However, after due diligence was undertaken this sale did not proceed.

You received an offer on XX XX 20XX of $Y and this offer also did not proceed after due diligence was undertaken.

There was an expression of interest on XX XX 20XX but a formal offer to purchase was not made until XX XX 20XX which led to a contract signed in XX 20XX with a Put & Call Option.

The option was for a period of X months.

The option was extended by the purchaser and a non-refundable extension fee was received by you and your sibling.

The contract was exchanged on XX XX 20XX with a settlement to occur on XX XX 20XX.

The sale did not settle due to finance issues of the purchaser. You and your sibling received further non-refundable extension fees.

The sale was again scheduled to settle on XX XX 20XX however this was further delayed.

Settlement took place a short time later.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 115-A

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-130

Income Tax Assessment Act 1997 section 118-195

Detailed reasoning

A capital gain or capital loss may be disregarded under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) where a capital gains tax event happens to a dwelling if it passed to you as a beneficiary of a deceased estate or you owned it as the trustee of the deceased estate.

For a dwelling acquired by the deceased after 19 September 1985, that was the deceased's main residence and not used to produce assessable income just before their death, you will be entitled to a full exemption if the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of the following individuals:

•         the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased), or

•         an individual who had a right to occupy the dwelling under the deceased's will, or

•         an individual beneficiary to whom the ownership interest passed and the CGT event was brought about by that person, or

•         your ownership interest ends within two years of the deceased's death.

Subsection 118-195(1) of the ITAA 1997 confers on the Commissioner the discretion to extend the two-year period in certain circumstances. Examples of these circumstances are outlined in Practical Compliance Guideline 2019/5 The Commissioner's discretion to extend the two year period to dispose of dwellings acquired from a deceased estate (PCG 2019/5).

The following is a non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion:

•         the ownership of a dwelling or a will is challenged;

•         the complexity of a deceased estate delays the completion of administration of the estate;

•         a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example: the taxpayer or a family member has a severe illness or injury); or

•         settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for reasons outside the beneficiary or trustee's control.

In considering whether to extend the two-year period in subsection 118-195 (1) of the ITAA 1997, all the factors both in favour and against the granting of the Commissioner's discretion must be considered.

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 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 which includes the sensitivity of your personal circumstances.

In your case, the delay in the disposal of the dwelling can be attributed to the marketing strategy adopted in selling the dwelling as a two lot offering. You combined the sale with an adjoining property and targeted potential property developers. This type of contract usually requires delayed settlement periods. This type of contract usually requires revised settlements due to finance issues.

You engaged the services of a real estate agent who specialises in this type of property sale and marketing strategy. While this may have realised a greater sale proceed for you it is more complicated and targeted a smaller potential market segment than that a traditional sale of a large suburban metropolitan dwelling.

The choices made by you and your sibling in engaging a real estate agent who advised on the sale strategy has resulted in you entering a more complicated contractual arrangement than ordinarily would be required if the sale was for a single dwelling.

The option agreement was also a choice of the executors and has caused delays in the settlement of the contract. It is noted that an offer was not accepted until more than X years from the date of death of the deceased. The eventual settlement was more than Y years from the date of death.

The capital gains tax consequences of marketing the sale of the dwelling with the adjoining property and agreeing to a delayed settlement should have been known by the executors prior to entering into the sale of the deceased's former main residence.

The executor had a number of responsibilities in winding up the estate of the deceased and one of these was to do with the ownership of the dwelling. We acknowledge that the sale could have been adversely impacted due to COVID-19. However, we consider that further steps were required to be undertaken to ensure the sale occurred within a timely manner. You are required to actively manage the sale. You did not attempt to sell the dwelling separately. The eventual sale did not occur until more than Y years had passed from the date of death.

Having considered the relevant facts, we are of the view the delays were not caused by circumstances outside the executor's control. Therefore, the Commissioner will not apply his discretion under subsection 118-195 (1) of the ITAA 1997 to allow an extension to the two-year time limit.

Consequently, any capital gain made on the property from the date the deceased passed away until the property was disposed of will be subject to tax. That is, the first element of your cost base for the property is its market value on the deceased's date of death. You are also entitled to the 50% CGT discount in relation to the property.