Edited version of private advice

Authorisation Number: 1052173581065

Date of advice: 28 September 2023

Ruling

Subject: Deceased estate - 2-year discretion

Question

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.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

XX XX 20XX

Relevant facts and circumstances

The property situated at X XX XX was acquired by the deceased on X XX 19XX.

The deceased passed away on XX XX 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 purpose of producing assessable income.

There was a challenge to the will which was resolved within six months of the deceased's passing.

Probate was granted on XX XX 20XX to XX XX and XX XX. Both executors reside in the same city in which the property is located.

The dwelling was listed for sale shortly after the challenge to the will was resolved.

A contract was entered into but settlement fell through for reasons outside of the control of the executors.

The trustee's solicitor went on annual leave during a Christmas and January period.

One of the executors was isolated with COVID on XX XX 20XX.

A contract for the sale of the property was signed on XX XX 20XX with settlement occurring on XX XX 20XX.

The property was vacant from the deceased's death until settlement.

The dwelling was sold by the executors of the deceased estate.

Sales data shows the number of houses sold in the suburb in which the property is located increased during the COVID-19 period compared to previous years.

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 dwelling on XX XX 19XX. After the deceased passed away, you owned the property as trustees 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 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.

Your contentions

You contend that:

•                     The partner of one of the beneficiaries has a serious illness which had a cumulative emotional effect on the beneficiary preventing them from communicating effectively with the trustees and other beneficiaries which hindered the administration of the estate for a significant period.

•                     The estate was more complex with other aspects of the estate to manage through the COVID-19 close-down periods in XX.

•                     The complexity of the deceased estate delayed the administration of the estate.

•                     One of the beneficiaries who lives in XX had repeated COVID-19 infections.

•                     The impact of COVID-19 prevented the property from being sold earlier than it was.

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 there was an initial sale contract that fell through for reasons outside of your control. However, there was a substantial period of delay after this.

•                     We acknowledge the emotional impact on one of the beneficiaries due to their partner's illness. However, this does not explain why the executors could not have continued to arrange for the sale of the property. The beneficiary was not an executor and no detail has been provided on what input was required from them in order to sell the property. Even if some input was required we do not think this would account for the whole period of delay.

•                     The unavailability of the executor's lawyer due to annual leave may have played a small part in the delay. However, this period of time does not explain the full delay.

•                     The COVID-19 infections to one of the beneficiaries who lives in XX do not explain why the two executors could not have administered the estate and sold the property.

•                     Sales data shows the number of houses sold in the suburb in which the property is located increased during the COVID-19 period compared to previous years. This objective evidence does not support your contention that the impact of COVID-19 prevented the property from being sold earlier than it was.

•                     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.

Conclusion

It is clear that the Commissioner's discretion is meant to be limited to situations where the trustees are 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 executors.

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. You are also entitled to the 50% CGT discount in relation to the property.