Edited version of private advice

Authorisation Number: 1052166107957

Date of advice: 28 September 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise the discretion under section 118-195 of the 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 2023

The scheme commenced on:

23 March 2019

Relevant facts and circumstances

The deceased passed away on XX XX 20XX.

The dwelling is located at the property.

The deceased acquired the property after 20 September 1985.

The property was the main residence of the deceased just before they passed away.

The property was not used to produce assessable income before or after the date of death.

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

The will does not contain a life interest clause regarding the property.

Probate was granted on XX XX 20XX.

The executor remained living in the property with the permission of the other beneficiaries.

A public state of emergency was declared in your state.

COVID-19 restrictions came into effect that included restrictions on open home inspections and public auctions. Viewings by appointment and digital sales were permitted during this time.

Restrictions on real estate sales are eased.

Restrictions continued to ease, all restrictions for real estate services are lifted.

Following the COVID-19 restrictions you attempted to find alternate accommodation which you deemed suitable. You determined suitable accommodation was not available or overpriced at this time.

You listed the property for sale on XX XX 20XX.

You entered into a contract to sell the property on XX XX 20XX with settlement occurring XX XX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Subsection 118-195(1) of the ITAA 1997 states that if you owned a dwelling that passed to you as a beneficiary of a deceased estate (or in your capacity as the trustee of a deceased estate), then you disregard any capital gain or loss made on the disposal of the property if:

•                     the property was acquired by the deceased before 20 September 1985; or

•                     the property was acquired by the deceased on or after 20 September 1985 and the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income

and

•                     your ownership interest ends within 2 years of the deceased's death (the Commissioner has discretion to extend this period in certain circumstances); or

•                     the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of:

-                    the spouse of the deceased immediately before the death; or

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

-                    if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary - that individual.

Generally, we 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.

Factors that would weigh in favour of allowing an extension include the following:

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

•                     a life tenancy 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

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

•                     restrictions on real estate activities imposed by a government authority in response to the COVID-19 pandemic.

Factors that would weigh against allowing an extension include the following:

•                     waiting for the property market to pick up before selling the dwelling

•                     waiting for refurbishment of the dwelling to improve the sale price

•                     inconvenience on the part of the trustee or beneficiary to organise the sale of the dwelling, or

•                     unexplained periods of inactivity by the executor in attending to the administration of the estate.

In considering whether to extend the 2-year period, we weigh up all the factors (both favourable and adverse) having regard to the facts and circumstances of the case.

The property sale settled more than 2 years after the deceased's death. Therefore, you require the Commissioner's discretion to extend the 2-year period to be eligible for an exemption.

The first delay was attributable to receiving the Probate. Secondly, COVID-19 restrictions did contribute to the delay of sale. As a result of restrictions in your state tenants could not be evicted. The same directive could be applied to you during this time as the reasoning behind the restriction is principally the same.

Some restrictions also impacted the usual actions taken by real estate to sell a property. Although restrictions on real estate activities occurred, they only limited open house inspections and public auctions for a period of two months, and they did not prevent listing of the property for sale.

After this period, you attempted to find alternate accommodation which you deemed suitable. You determined suitable accommodation was not available or overpriced at this time. An extended period of inactivity in attending to the administration of the estate, in this instance the selling of the property, followed.

The 2-year period of disposal expired. This was followed by another period of inactivity. We acknowledge that due to COVID-19 the rental market was and continues to be less affordable and it is more difficult to secure rental accommodation however due to the length of the periods of inactivity and as you had no right to occupy the residence under direction of the will this would not be considered an extenuating circumstance but rather a choice you made to remain in the property until you located accommodation that you considered suitable.

Similarly in Example 2 - no safe harbour - family member residing in dwelling of the Practical Compliance Guideline PCG 2019/5 Capital gains tax and deceased estates - the Commissioner's discretion to extend the 2-year period to dispose of dwellings acquired from a deceased estate the taxpayer lived with the deceased prior to their death and remained in the dwelling after death for an extended period with the permission of the trustee. In this example they remained in the property until they could find full-time employment and presumably afford/ locate alternate accommodation. Because the delay in selling the dwelling was not caused by any of the circumstances described as favourable factors, the trustee cannot rely on the safe harbour. The decision to allow the taxpayer to reside in the dwelling was a matter of choice within the control of the trustee.

Having considered the relevant facts, the Commissioner will not apply the discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the 2-year time limit. Therefore, the normal CGT rules will apply to the disposal of the property. You should note that the first element of the cost base for the property is its market value on the deceased's date of death. You are entitled to the 50% CGT discount in relation to the property.