Edited version of private advice

Authorisation Number: 1052168555675

Date of advice: 19 September 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 to allow an extension of time for you to dispose of your ownership interest in the property 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 DD MM 20YY.

The dwelling is located at XXXX (the property).

The deceased acquired the property before 20 September 1985.

The property was the main residence of the deceased just before they passed away and was not used to produce income at that time.

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

Probate was granted on DD MM 20YY.

The property was transferred to you on DD MM 20YY.

The property was largely in original condition, unrenovated since the property was first purchased.

From this time until settlement of the sale of the property, there were multiple periods of disruption caused by COVID-19 restrictions which impacted tradesperson and materials availability.

The renovations were eventually completed on DD MM 20YY. Additional minor works were completed afterward. The property was then placed on the market for sale.

The property was contracted for sale on DD MM 20YY, with settlement occurring on DD MM 20YY.

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 prior to 19 September 1985, 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 prior to 19 September 1985. After the deceased passed away, you owned the property as a beneficiary.

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 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 delay in the sale of the dwelling was due to reasons beyond your control.

Paragraph 14 of PCG 2019/5 explains we weigh up all of the factors (both favourable and adverse).

Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example:

•         The ownership of a dwelling or a will is challenged.

•         The complexity of a deceased estate delays the completion of administration of the estate.

•         A trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising (for example, the taxpayer or a family member has a severe illness or injury).

•         Settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control.

Factors that would weigh against the granting of the discretion include:

•         Waiting for the property market to pick up before selling the dwelling.

•         Property used to earn assessable income.

•         Renovations or other activities designed to increase the sale price, or

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

The above examples are not exhaustive.

We consider that a substantial portion of the delay in the disposal of the property was not a result of factors outside of your control but as a result of your actions and choices to postpone the sale of the property until the maintenance and renovations had been completed.

Although COVID-19 contributed to delays in renovating the property, the property could have been sold in its current state unless there was a particular legal restriction that prevented the property from being sold in its present condition. No evidence of such a legal impediment has been provided.

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