Edited version of private advice

Authorisation Number: 1052160226126

Date of advice: 11 September 2023

Ruling

Subject: Deceased estate - discretion

Question 1

Will the Commissioner exercise the discretion under section 118-195 of 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 capital loss you made on the disposal?

Answer

No.

Question 2

In the event the Commissioner does not exercise his discretion to extend the time to dispose of your ownership interest beyond two years, will the capital gain or loss be calculated on the basis that the dwelling was acquired for its market value as at the deceased's death?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

XX XXX 20XX

Relevant facts and circumstances

XX XXX (the deceased) passed away on X XXX 20XX.

The property is less than 2 hectares.

The dwelling was the deceased's main residence up until their date of passing.

The property was not used for the purposes of producing assessable income at the time of their death or at any other time.

The executor (you) lived in the house with the deceased as their carer up until their passing and continued to live there until settlement date.

The property was put on the market in XX 20XX.

There was no interest in the property until XX 20XX.

A contract of sale was accepted on the property on XX XXX 20XX.

You wanted a XX- or XX-day settlement.

Purchaser wanted a longer settlement period until XX XXX 20XX.

The dwelling was sold by you as the executor of the deceased estate.

You personally suffered mental health issues with anxiety in response to the presence and effect of COVID and COVID lockdowns and the passing of the deceased, and in particular in regard to the sale of XX XXX (the family home) where you lived with the deceased as their carer from 20XX.

You were called upon to attend jury duty in this period but could not attend due to your anxiety.

The deceased's last will and testament states 'In the event that XX XXX predeceases me or dies before my will is proved or in the event that they become incapable or is unwilling to act as my trustee at the time of my death then I appoint my child, to be the executor of this will.'

COVID lockdowns were in place during the following periods:

•         Lockdown 1 - XXXX

•         Lockdown 2 - XXXX

•         Lockdown 3 - XXXX

•         Lockdown 4 - XXXX

•         Lockdown 5 - XXXX

•         Lockdown 6 - XXXX

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Question 1

Will the Commissioner exercise his discretion under section 118-195 of 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 capital loss you made on the disposal?

Summary

The Commissioner will not exercise his discretion under section 118-195 of the Income Tax Assessment Act 1997 to extend the period for disposal as you have not met the relevant criteria for an extension.

Detailed reasoning

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 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 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.

After the deceased passed away, you owned the property as trustee of the estate.

The property was the deceased's main residence until just before they passed away and was not used to produce assessable income.

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). Paragraph 17of 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.

Your contentions

You contend that:

•         The estate was more complex with other aspects of the estate to manage through the COVID 19 close-down periods which was particularly harsh and restrictive in your State.

•         The COVID closedown interfered and interrupted real estate activity through the period and there was no interest for the property from purchasers during this time.

•         The property was put on the market within the 2 years period but there was no interest from buyers despite strong efforts by the real estate agent.

•         You were not waiting for the property market to pick up.

•         There were literally no interested buyers for this house in this area.

•         The property sold as soon as you had an actual offer.

•         The sale was actively managed to completion and it was settled within the 12 months of the property being listed for sale.

•         The anxiety you experienced prevented you from attending to administration of the estate for long periods totalling over 12 months in the first 2 years after the deceased's death.

Consideration of your circumstances

In this case the Commissioner has decided not to exercise his power to extend the two-year period. We have taken the following into consideration when making our decision:

We acknowledge that the mental health issues you experienced during the time of the deceased's passing would have made the administering of the estate more difficult. However, a replacement executor could have been appointed if you were unable to attend to your duties as the executor of the deceased's estate. You could have relinquished your role and appointed another executor as per the deceased's will. Not to do so was a choice by you that delayed the sale of the property, rather than a matter that was outside of your control.

The information and documentation provided does not support that the deceased estate was of a complex nature. Therefore, this is not a factor that the Commissioner would take into consideration when making the decision on whether to exercise the discretion to extend the two-year period to dispose of the property.

We also considered the time it took for you to place the property on the market was 21 months after the deceased's passing. After the deceased passed, COVID lockdowns (2) to (6) took place. There were a total of 224 days of lockdown which accounts for approximately 8 months. Between the lockdowns there were periods of time when the property could have been placed on the market. Also, the COVID lockdown periods ended in XXXX and the property was not placed on the market until approximately six months later.

Conclusion

It is clear that the Commissioner's discretion is meant to be limited to situations where the owner is effectively prevented from selling the property. The intention of the two-year period is to allow the orderly and timely sale of deceased estate property.

Based on the information and documentation provided with this private ruling it has been determined that the Commissioner's discretion will not be exercised to extend the two-year period as there was a significant period of delay in disposing of the property that was not outside of the control of the executor.

Question 2

In the event the Commissioner does not exercise his discretion to extend main residence exemption beyond two years, will the capital gain or loss be calculated on the basis that the dwelling was acquired for its market value as at the deceased's death?

Detailed reasoning

Item 3 of the table in subsection 128-15(4) of the Income Tax Assessment Act 1997 provides that where a deceased was not an excluded foreign resident and the dwelling was their main residence just before they died and not used to produce assessable income at that time, the CGT cost base of the dwelling for the trustee of their estate is the market value on the day they died.

Based on the information provided, you meet these conditions and therefore the CGT cost base of the dwelling is the market value on the date of the deceased's death.

Also, you will be entitled to a 50% CGT discount under Division 115 of the Income Tax Assessment Act 1997 as the dwelling has been held for at least 12 months.