Edited version of private advice

Authorisation Number: 1052168857609

Date of advice: 14 September 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise his discretion in subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the two-year period within which a dwelling must be sold to obtain a full main residence exemption?

Answer

Yes, having considered your circumstances and the relevant factors the Commissioner will allow an extension of time. However, the extension only extends to the dwelling and the land to the extent that the land was used primarily for private and domestic purposes in association with the dwelling, up to a maximum area of 2 hectares.

This ruling applies for the following periods:

Income year ended 30 June 20XX.

Income year ended 30 June 20XX.

Income year ended 30 June 20XX.

Income year ended 30 June 20XX.

Income year ended 30 June 20XX.

Income year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Deceased left a Will. Under the Will, the beneficiaries are deceased's children.

The Probate was granted to the Executor of the estate.

The assets of the Estate included a dwelling and adjacent land (the Property).

The Property:

• was acquired by the deceased after 1985;
• is more than 2 hectares;
• was the main residence of the deceased just before the deceased's death;
• was not used for the purpose of producing assessable income at the time of the deceased's death;

The Property was not sold within the 2-years after the date of death because:

• it took several months for the Probate to be granted;
• the family of the deceased could not find a buyer, despite engaging with multiple agents
• COVID-19 and associated lockdowns made it difficult to find a buyer;

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110.

Income Tax Assessment Act 1997 section 118-120.

Income Tax Assessment Act 1997 section 118-195.

Income Tax Assessment Act 1997 subsection 118-195(1).

Income Tax Assessment Act 1997 Division 128

Reasons for decision

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997.

Summary

The Commissioner will exercise his discretion under subsection 118-195(1) and allow an extension of time to the two-year period for executors of the estate to dispose of the property and the land to the extent that the land was used primarily for private and domestic purposes in association with the Property, up to a maximum area of 2 hectares. No exemption is available to the excess of the Property land over the two hectares, which will be assessed under the general capital gains tax (CGT) provisions.

Detailed reasoning

Dwellings and land acquired from deceased estates

Division 128 contains rules that apply when an asset owned by a person just before they die, passes to their legal personal representative (LPR) or to a beneficiary in a deceased estate.

When a taxpayer dies, assets that pass to a beneficiary of the taxpayer's estate are taken to be acquired by them on the day the taxpayer died under subsection 128-25(2).

When a beneficiary of the taxpayer's estate acquires an asset as a result of the taxpayer's death, the cost base and reduced cost base of the asset in the hands of the beneficiary are modified under subsection 128-15(4).

Main residence of the deceased and exemption

Subsection 118-195(1) states that 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:

• 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
• both of the following requirements are satisfied:
  • the deceased acquired the ownership interest 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, or within a longer period allowed by the Commissioner; and
• the deceased was not an excluded foreign resident just before the deceased's death.

In other words, the Commissioner has discretion to extend the two-year time period in subsection 118-195(1) where the trustee or beneficiary of a deceased estate's ownership interest ends after two years from the deceased's death.

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 (PCG 2019/5) provides guidance on circumstances in which the Commissioner may exercise his discretion in extending the two-year period. It outlines a safe harbour compliance approach that allows taxpayers to manage their tax affairs as if the Commissioner had exercised the discretion to allow them a period longer than two years.

Paragraph 11 of the PCG 2019/5 outlines the conditions of the safe harbour compliance approach as follows:

Safe harbour - conditions

11. To qualify for the safe harbour, you must satisfy all of the following conditions:

•  during the first two years after the deceased's death, more than 12 months was spent addressing one or more of the circumstances described in paragraph 12 of this Guideline

•  the dwelling was listed for sale as soon as practically possible after those circumstances were resolved (and the sale was actively managed to completion)

•  the sale completed (settled) within 12 months of the dwelling being listed for sale

•  if any of the circumstances described in paragraph 13 of this Guideline were applicable, they were immaterial to the delay in disposing of your interest, and

•  the longer period for which you would otherwise need the discretion to be exercised is no more than 18 months.

Paragraph 12 of the PCG 2019/5 outlines the circumstances in which the Commissioner may exercise his discretion in extending the two-year period as they may take more than 12 months to resolve:

Circumstances that took more than 12 months to resolve

12. One or more of the following circumstances must have taken more than 12 months to address:

•  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.

Paragraph 13 of the PCG 2019/5 outlines the circumstances in which the Commissioner will not exercise his discretion in extending the two-year period as they cannot be material to delays in disposal of the dwelling:

Circumstances that cannot be material to delays in disposal

13. In order to qualify for the safe harbour, none of the following circumstances can have been material to the delay in disposing of your interest:

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

•  delay due to 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.

Area of the main residence and land

Section 118-120 states that the main residence exemption also includes up to a maximum of 2 hectares of land used primarily for private and domestic purposes in association with the dwelling.

The main residence exemption may be extended to adjacent land associated to a dwelling if the following conditions contained in section 118-120 are met:

• the same CGT event happens to the land (or the taxpayer's ownership interest in it) as happens in relation to the dwelling (or the taxpayer's ownership interest in it) under subsection 118-120(1);
• land adjacent to a dwelling is its adjacent land to the extent that the adjacent land was used by the taxpayer primarily for private or domestic purposes in association with the dwelling under subsection 118-120(2); and
• the maximum area of adjacent land covered by the exemption for the CGT event is two hectares, less the area of the land immediately under the dwelling under subsection 118-120(3).

Application to your circumstances

It is determined that the Trustees satisfy the conditions in paragraph 12 of the PCG 2019/5 to qualify for the safe harbour approach because:

aspects that were material in affecting the timeliness of the Trustees' progress include:

•         the complexity of the estate:

•         it took several months for the Probate to be granted;

•         despite engaging with multiple, the family of the deceased could not find a buyer,

•         COVID-19 and associated lockdowns made it difficult to find a buyer.

The combination of the above aspects had a significant impact on progress and each of the factors were clearly beyond the control of the Trustee/Administrator and their combined impact applied for a significant portion of the two-year period. A contract to sell the Property was signed.

The Commissioner will exercise his discretion and grant the Trustees the extension of the two-year period to dispose of the Property under subsection 118-195(1).