Edited version of private advice

Authorisation Number: 1052152142617

Date of advice: 3 August 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 ('ITAA 1997') to treat a capital gain from the disposal of a property by a deceased estate that was a pre-CGT asset to be exempt from CGT, even though it was sold more than 2 years after the date of the deceased's death?

Answer

Yes.

This ruling applies for the following periods

DD MM YYYY to DD MM YYYY

The Scheme commences on

DD MM YYYY

RELEVANT FACTS AND CIRCUMSTANCES

Background information

1.      The Deceased'), was born on DD MM YYYY in XXX and died on DD MM YYYY in ZZZ aged xx years.

2.      The Deceased's usual place of residence prior to her death was XYZ.

3.      The Deceased purchased the property at ZYX ('the Property') on DD MM YYYY from the Government Department.

4.      The Property comprised a house on a block of land, approximately xx m² in size.

5.      The Deceased was an Australian tax resident and lived on the Property with her mother, and sibling, for many decades before the Government Department offered to sell them the Property.

6.      The Deceased eventually moved out of the Property and moved to XXX, while her mother and sibling remained in the Property.

The Deceased's Will

7.      The Deceased left a Will dated DD MM YYYY, appointing Taxpayer A as her Executor.

8.      The Deceased's Will left her estate to a number of beneficiaries, none of whom were her sibling. The bulk of her estate (including the Property) was left to Taxpayers B, C and D.

Caveat on the Property

9.      The Deceased's sibling considered that she should have an equitable interest in the Property, due to the many years she had lived there, and due to her relationship to the Deceased.

10.   Accordingly, the sibling registered a caveat against the Property on DD MM YYYY (prior to the death of the Deceased).

11.   At the time of the Deceased's death on DD MM YYYY, the caveat was still registered against the Property.

12.   Due to the caveat registered against the Property, Taxpayers B, C and D were unable to have the Property transferred into their names.

Administration of Estate

13.   The title to the Property was transferred to Taxpayer A in his capacity as Executor of the deceased estate. This was necessary under XXX law, given the life interest caveat lodged against the Property.

14.   In YYYY, after the Deceased's death, Taxpayers B, C and D appointed legal counsel to have the caveat removed so that the property could be sold, and the proceeds distributed to the beneficiaries.

15.   Taxpayers B, C and D also intended to make a formal arrangement to secure the Deceased's sibling's right to live at the Property until she no longer wanted to or needed to. However, this was met with hostility by her lawyers, and the parties were unable to come to a mutual agreement.

16.   Given these circumstances, and the refusal of the Deceased's sibling to vacate the Property, Taxpayers B, C and D considered that the only option available to them was to wait for the sibling to move out of the Property, before they could apply for the removal of the caveat.

17.   As such, the Deceased's sibling continued to live at the Property rent free.

18.   In MM YYYY, Taxpayers B, C and D discovered that the Deceased's sibling had recently moved out of the Property into assisted home care. Taxpayers B, C and D applied for the removal of the caveat at that time, and this was finally granted in MM YYYY.

19.   Taxpayers B, C and D were notified of the removal of the caveat in a letter dated DD MM YYYY.

20.   When Taxpayers B, C and D were able to inspect the Property, they discovered that the house was left in disrepair and still contained the sibling's belongings. As such, extensive work was required to be undertaken to prepare the Property for sale.

21.   In MM YYYY, Taxpayers B, C and D located the aged care home where the sibling had moved to and enquired if she still wanted her belongings. The aged care home advised that the sibling could not physically collect her belongings and also did not have any family to assist with this.

22.   As such, in MM YYYY, Taxpayers B, C and D collected the various items the sibling wanted and passed them to her. They also undertook research and made legal enquiries to confirm what they should do with the remaining belongings of the sibling, given they had been abandoned.

23.   In MM YYYY, Taxpayers B, C and D organised contractors to remove and dispose of the sibling's remaining belongings from the Property. A real estate agent was then appointed by the executor of the deceased estate to sell the Property and the sale listing went live on DD MM YYYY.

Sale of the Property

24.   The Property was sold at auction and a contract was entered into for the sale of the property on DD MM YYYY by Taxpayer A (in his capacity as executor of the deceased estate) and settlement occurred on DD MM YYYY.

25.   The property was sold to an unrelated party for the sale price of $xxx.

Information provided

26.   You have provided a number of documents containing detailed information in relation to Taxpayer A's private ruling application, including:

•           Private Binding Ruling ('PBR') Application, dated DD MM YYYY

•           Additional Appendices and Certificates

27.   We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Assumption(s)

Not applicable.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 118-130(3)

Income Tax Assessment Act 1997 Section 118-195

Further issues for you to consider

Not applicable.

REASONS FOR DECISION

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

SUMMARY

The Commissioner will exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 to allow an extension to the 2-year limit up until the settlement date (22 May 2023) for the Capital Gains Tax ('CGT') exemption on the sale of the inherited dwelling that was the main residence of the deceased.

DETAILED REASONING

28.   Subsection 118-195(1) of the ITAA 1997 outlines the following with regard to a dwelling acquired from a deceased estate:

(1)    A capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if:

(a)    you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

(b)    at least one of the items in column 2 and at least one of the items in column 3 of the table below are satisfied; and

(c)    the deceased was not an excluded foreign resident just before the deceased's death.

Table 1: Beneficiary or trustee of deceased estate acquiring interest

29.   Subsection 118-130(1) of the ITAA 1997 defines ownership interest in a dwelling as having a legal interest of the dwelling until it ends on settlement of the property.

30.   Subsection 118-130(3) of the ITAA 1997 provides that where the sale or other disposal of the dwelling proceeds under a contract, the ownership interest ends at the time of settlement of the contract of sale and not at the time of entering the contract, as follows:

(3) For land or a dwelling where you have a contract for the happening of the *CGT event, you have an ownership interest in it until your legal ownership of it ends.

31.   Paragraph 1 of 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", states that section 118-195 ITAA 1997 disregards capital gains and capital losses made from certain CGT events that happen in relation to a dwelling that was a deceased person's main residence and not being used to produce assessable income just before they died, or was acquired by the deceased before 20 September 1985.

32.   Paragraph 2 of PCG 2019 / 5 states that if you disposeof an ownership interest in a dwelling that passed to you as an individual beneficiary or as the trustee of the deceased's estate within two 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 two year period.

33.   Paragraph 3 of PCG 2019 / 5 states that, generally, 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.

34.   Paragraph 12 of PCG 2019 / 5 outlines the circumstances that take more than 12 months to resolve, which will be considered by the Commissioner:

•           the ownership of the dwelling, or the will, is challenged

•           a life 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, or

•           settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of your control.

35.   Paragraph 15 states that factors that would weigh in favour of the Commissioner allowing a longer period include those listed in paragraph 12 of PCG 2019 / 5 above. The absence of some or all of those favourable factors does not necessarily preclude us from allowing a longer period.

APPLICATION TO YOUR CIRCUMSTANCES

36.   Considering the provisions of subsection 118-195(1) of the ITAA 1997, a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if:

a)     you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

b)     at least one of the items in column 2 and at least one of the items in column 3 of the table (see previous section) are satisfied; and

c)      the deceased was not an excluded foreign resident just before the deceased's death.

37.   In this matter, the Deceased acquired the Property on DD MM YYYY. As per Item 2 in Column 2 as set out in subsection 118-195(1) of the ITAA 1997, the Deceased acquired the ownership interest before 20 September 1985, so the Property is considered to be a pre-CGT asset.

38.   The Deceased passed away on DD MM YYYY.

39.   The bulk of the Deceased's estate (including the Property) was left to Taxpayers B, C and D.

40.   The Deceased's sibling had registered a caveat against the Property on DD MM YYYY (prior to the death of the Deceased), as she considered that she should have an equitable interest in the Property, due to the many years she had lived there, and due to her relationship to the Deceased.

41.   Due to the caveat registered against the Property, Taxpayers B, C and D were unable to have the Property transferred into their names.

42.   In YYYY, after the Deceased's death, Taxpayers B, C and D appointed legal counsel to have the caveat removed so that the property could be sold, and the proceeds distributed to the beneficiaries. Taxpayers B, C and D also intended to make a formal arrangement to secure the sibling's right to live at the Property until she no longer wanted to or needed to. However, this was met with hostility by the sibling's lawyers, and the parties were unable to come to a mutual agreement for many years.

43.   Given these circumstances, and the refusal of the sibling to vacate the Property, Taxpayers B, C and D considered that the only option available to them was to wait for the sibling to move out of the Property before they could then apply for the removal of the caveat.

44.   In MM YYYY, Taxpayers B, C and D discovered that the sibling had recently moved out of the Property into assisted home care, so they applied for the removal of the caveat at that time, and this was finally granted in MM YYYY. Taxpayers B, C and D were notified of the removal of the caveat in a letter dated DD MM YYYY.

45.   When Taxpayers B, C and D were able to inspect the Property, they discovered that the house was left in disrepair and still contained the sibling's belongings. As such, extensive work was required to be undertaken to prepare the Property for sale.

46.   In MM YYYY, Taxpayers B, C and D organised contractors to remove and dispose of the sibling's remaining belongings from the Property. A real estate agent was then appointed by the executor of the deceased estate to sell the Property and the sale listing went live on 2DD MM YYYY.

47.   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" ('PCG 2019/5') outlines how the capital gains tax (CGT) main residence exemption may apply where you dispose of a dwelling that passed to you either as an individual beneficiary or trustee of a deceased estate.

48.   Section 118-195of the ITAA 1997disregards capital gains and capital losses made from certain CGT events that happen in relation to a dwelling that:

•           Was a deceased person's main residence and was not being used to produce assessable income just before they died, or

•           was acquired by the deceased before 20 September 1985.

49.   The conditions in paragraph 118-195(1)(b) of the ITAA 1997 can be satisfied if at least one of the items in column 2 and at least one of the items in column 3 of the table in the subsection are satisfied. In this case, the item in column 2 of item 2 is satisfied as the deceased acquired the ownership interest before 20 September 1985. The item in column 3 of item 1 will be satisfied if a longer period to dispose of the property is allowed by the Commissioner.

50.   If you disposeof 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.

51.   As per Item 1 in Column 3 as set out in subsection 118-195(1) of the ITAA 1997, the Trustees of the Deceased Estate's ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner.

52.   Generally, the ATO 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.

53.   As the Property was disposed of more than xx years after the date of death of the Deceased, the safe harbour provisions under PCG 2019/5 cannot apply. However, the factors outlined in PCG 2019/5 are indicative of the types of things the Commissioner will take into account in determining whether to exercise his discretion to extend the two year time limit under section 118-195 of the ITAA 1995.

54.   The delay in selling the Property was due to a number of complex factors, which were outside of the control of Taxpayer A, the named Executor. All relevant parties at all times worked to administer the estate and sell the Property as expeditiously as possible.

55.   All factors considered, the Administrators did everything in their power to progress the estate and dispose of the Property.

56.   Having considered all the relevant facts, extenuating circumstances and the protracted legal proceedings, the Commissioner will apply the discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit until DD MM YYYY, the date of settlement of the property and the date when the Trustees of the Deceased Estate's ownership interest ends.

CONCLUSION

The Commissioner will exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 to allow an extension to the 2-year limit up until the settlement date (DD MM YYYY) of the property for the Capital Gains Tax ('CGT') exemption on the sale of the inherited dwelling that was the main residence of the deceased.