Edited version of private advice

Authorisation Number: 1052148954058

Date of advice: 14 August 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise the discretion under 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 the capital gain or loss made on the disposal?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away on XX/XX/20XX.

The deceased and their late spouse A acquired the dwelling located at XXX (the Property) as tenants in common.

The deceased acquired A's share in the dwelling upon A's passing on XX/XX/20XX.

The Property was the main residence of the deceased from XX/XX/20XX until they moved into a nursing home in XXX/20XX.

It was then left vacant until the deceased's death.

The dwelling was situated on less than 2 hectares of land.

The deceased did not own any other real estate property.

Probate was granted to the executors of the deceased estate on XX/XX/20XX.

In XX/20XX, before the deceased's passing, the Property was put up for sale but the buyer pulled out due to the need for disclosure of an issue involving a retaining wall that impacted the Property.

Another offer to buy the Property was received but it was declined as it was below the price the Property was purchased for in 20XX.

Continuing attempts were made both before and after the deceased's passing to resolve the issue with the defective retaining wall. COVID restrictions made attempts to resolve the retaining wall issue more difficult.

In XX/20XX, the dwelling was prepared to be rented and was subsequently rented out.

The real estate agency required a X-monthly review of the wall.

You and another beneficiary each inherited a 50% ownership interest in the Property.

On XX/XX/20XX a surveyor completed a number of formal reviews to measure the movements of the wall and they showed little to no further movement since the original issue was discovered.

After the final engineering inspection, you and the other co-owner decided to sell the Property.

A contract of sale was signed on XX/XX/20XX for $XXX,XXX which was discounted from normal market value due to the retaining wall issue.

Settlement occurred on XX/XX/20XX.

Relevant legislative provisions

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

Reasons for decision

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 an individual and 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 their main residence and not used to produce assessable income just before their death, you will be entitled to a full exemption if your ownership interest ends within two years of the deceased death. Your ownership interest ends at the time of settlement of the contract of sale.

In your case, the deceased acquired the Property after 19 September 1985. The Property was the deceased's main residence until they moved into a nursing home. The Property can be treated as the main residence of the deceased at their date of death due to the application of the absence rule under section 118-145 of the ITAA 1997.

You and another beneficiary each inherited a 50% ownership interest in the Property.

The property sale by you and the other co-owner 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 two-year period to dispose of dwellings acquired from a deceased estate outlines the factors that the Commissioner will consider when determining whether or not to exercise their discretion to extend the two-year period under section 118-195 of the ITAA 1997.

Paragraph 3 of PCG 2019/5 provides that the Commissioner will allow a longer period where the sale of the dwelling could not be settled within two years of the deceased's death due to reasons beyond your control.

Paragraph 14 of PCG 2019/5 explains that we weigh up all the factors both in favour and against the granting of the Commissioner's discretion.

In your case, the dwelling was initially put up for sale before the deceased's death, but the buyer pulled out due to the retaining wall issue. Another offer to buy the house was received but it was declined because the offer was considered too low. The final sale went through with the issue unresolved.

We can understand that you and the other co-owner wished to achieve a higher sale price by having the retaining wall repaired before sale. However, it was still possible to sell the property without the retaining wall repairs as demonstrated by the fact that an earlier offer was received on the property with the issue unresolved and it was eventually sold without the wall being repaired. Although it was an understandable choice, it was nevertheless still a choice to delay the sale of the Property in order to attempt to resolve the retaining wall issue.

PCG 2019/5 states that delays due to trying to achieve a higher sale price would weigh against the exercise of the discretion.

We have considered all your circumstances and as there was a significant period of delay that was not outside of your control, the Commissioner will not exercise the discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension of time.

Therefore, 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 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.