Edited version of private advice

Authorisation Number: 1052149312498

Date of advice: 1 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 (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 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

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

The property located in State A was the main residence of the deceased just before they passed away and was not used to produce assessable income at the time of death.

The deceased passed away intestate. The deceased had several children who were all entitled to an equal distribution of the estate under intestacy laws.

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

The property has remained vacant since the deceased passed away.

It was difficult for the beneficiaries to reach an agreement on what should happen to the property. It was also difficult for some of them to come to terms with the deceased's passing.

There was some debate over which of the children should be appointed as administrators of the estate.

It was decided that you would be administrators of the estate.

The estate consisted mainly of the property, a bank account and personal effects.

Letters of Administration were granted less than six months after the deceased's death.

Subsequently, for almost two and a half years, the beneficiaries attended the property to clear personal effects and household contents, including pantry and kitchen items, clothes, linen, and tools.

You became aware of structural issues with the floor when you started moving some of the furniture out of the property. You sought a repairer to arrange the underpinning of the building foundations.

Approximately 22 months after the deceased's death, an agreement was reached by the beneficiaries to sell the property and real estate agents were engaged for advice.

You were advised by several real estate agents that electrical work was required prior to the property being sold.

You were also advised that wired smoke alarms were required to be installed to be compliant with state laws.

You commenced looking for an electrical contractor to carry out this work. Due to COVID-19, border closures and building activity in State A, sourcing trades was difficult.

All members of your family contracted COVID-19 at least once. The beneficiaries had XX immediate family members and it was difficult for everyone to contribute each week to clear personal effects and items in the house and sheds.

All the beneficiaries lived in State A.

In XX/20XX, an underpinning repairer was engaged. An electrician was also engaged; however, due to a contractor becoming unwell, the work was delayed.

During XX/20XX and XX/20XX, underpinning attempts occurred, however these attempts were unsuccessful.

In XX/20XX, the electrical work was completed, and a structural engineer was sought.

When the property was about to be listed for sale, one of the beneficiaries obtained finance approval and made an offer to purchase it with their spouse. All family members consented to the sale via a formal deed.

A contract was entered into to sell the property on XX/XX/20XX with settlement occurring 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 where a capital gains tax event happens to a dwelling if you owned it as the trustee or beneficiary of the deceased estate.

For a dwelling that was the deceased's main residence and not used to produce income when they passed away, you will be entitled to a full exemption if your ownership interest ends within two years of the deceased's death.

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

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 Capital gains tax and deceased estates - the Commissioner's discretion to extend the two-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).

Your case

A factor that would be adverse to the allowing of an extension is if the delay was contributed to by the use of the property to produce income. However, we note in your case that the property was left vacant after the deceased passed away, that is, it was not used for income producing purposes. Therefore, the use of the property does not detract from your case for an extension.

You contend that the delay in the sale of the property was primarily caused by COVID-19 lockdowns and restrictions. You referred to the restrictions on gatherings in particular. You also contend that the impact of COVID-19 made it difficult for you to source appropriate trades to complete work on the property.

We acknowledge that COVID-19 would have resulted in some difficulties in relation to the property. However, we note that all the beneficiaries lived in State A, all the gathering restrictions in State A were lifted within two months of the deceased's death, and any local lockdowns in State A were for short periods. There were other restrictions during some periods, for example, in relation to mandatory mask wearing, closing of night clubs and cancelling of music festivals. However, there is no indication that these other restrictions prevented the beneficiaries from being able to attend the property to clear it.

You have provided evidence that State A law requires smoke alarms and safety switches to be installed before a property can be sold. Although we acknowledge that tradespeople would have been harder to source during COVID-19, this is relatively straightforward electrical work but took a year to be completed.

In your explanation for the delay, you also referred to the fact that attempts were made to undertake structural work to the property. Apart from limited exceptions (such as with smoke alarms and safety switches in State A), generally a property can be sold in an 'as is' condition. Therefore, unless it is required under law, work done or attempted to be done, to improve the condition of a property from what it was when the deceased passed away is not favourable to allowing an extension. Consequently, in your case the attempts to undertake structural work is an unfavourable factor.

The passing of a family member is always a difficult time, and this is recognised under the law by the allowance of a two-year period to dispose of the deceased's dwelling. The property in this case was a suburban residence and it would not be expected to be an overly lengthy task to prepare the property for sale. The delay in this case was contributed to by the decision of the beneficiaries to have all or several of them present when clearing the property. This was a choice of the beneficiaries rather than a matter that was out of their control.

In addition, there is no information to indicate there has been a challenge to the estate or that the estate was of a complex nature. Although the deceased died intestate and there was some debate as to who the administrators should be, the Letters of Administration were granted less than six months after the deceased passed away.

Having considered all the relevant facts and weighing up all the factors, we will not apply the discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the two-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 your cost base for the property is its market value on the deceased's date of death. The cost of the work done to the property 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.