Edited version of private advice

Authorisation Number: 1052168083998

Date of advice: 15 November 2023

Ruling

Subject: Capital gains tax

Question

Will the Commissioner exercise the discretion to allow an extension of time to dispose of your ownership interest in the property and disregard the capital gain made on the disposal?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

The deceased purchased the property with you and your spouse. The property was held as tenants in common with the deceased holding a larger percentage of the property.

The deceased passed away a few years later.

The property was the deceased's main residence just before they passed away, and you and your spouse lived there as well.

The property was less than 2 hectares in size.

The property was never used to produce income.

The deceased's will appointed you and your sibling as co-executors. The will provided for the estate residue to be evenly divided between you and your sibling.

The reason for the delay in selling the property within the 2-year time allowed under the legislation is as follows:

There has been a long-running dispute between you and your sibling which prevented an application for probate, with a complicating factor being the deceased's involvement as guarantor and co-borrower on multiple mortgages and lines of credit held by you and your spouse.

Your sibling lives in another area and you agreed that you would be best placed to organise probate.

You were not aware of the procedure in applying for probate and you were grieving for your parent with whom you were very close.

In the following year, your sibling e-mailed you expressing their concern that probate was not progressing.

Numerous letters between your solicitor and your sibling's solicitor were exchanged over a number of years. Some of the key events are listed below.

You received a letter from your sibling's solicitor demanding estate documents.

Your solicitor wrote to your sibling's solicitor to advise of intention to seek probate.

Your sibling's solicitor refused to consent to your application.

Your sibling's solicitor wrote to Supreme Court to lodge a probate caveat against estate.

Email from your sibling's solicitor to your solicitor communicating agreement to joint application for probate and terms of proposal in the Deed of Family Arrangement.

Deed of Family Arrangement executed, and agency agreement for sale of the property.

Grant of probate issued.

Signed contract of sale of the property.

The sale of the property settled.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

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 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.

In your case, the deceased acquired the property after 19 September 1985. 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 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 provides guidance on when the Commissioner will grant discretion to extend the two-year period to dispose of dwellings acquired from a deceased estate.

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 the factors (both favourable and adverse). Paragraph 17 of 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.

In your case, we consider as favourable factors:

•         there was complexity of the estate; specifically, the long-running dispute between the executors which prevented an application for probate, and a complicating factor being the deceased's involvement as guarantor and co-borrower on multiple mortgages and lines of credit held by you and your spouse.

•         the property was sold promptly after the disputes between the executors were resolved.

We also consider as unfavourable factors:

•         We acknowledge your grief of losing your parent, however, during this period you did not take any steps to apply for probate nor did you progress the sale of the property.

•         You and your wife continued living in the property for the period after death until settlement. You benefitted from being able to live in the property while the dispute was in progress.

•         For a period of time, there is another significant period of unexplained inactivity.

Having considered the relevant facts, we will not apply the discretion under subsection 118- 195(1) of the Income Tax Assessment Act 1997 (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 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.