Edited version of private advice

Authorisation Number: 1052178549785

Date of advice: 19 October 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 dispose of your ownership interest in the dwelling and disregard the capital gain or loss made on disposal?

Answer

No.

This ruling applies for the following period:

Year ended X X 20XX

The scheme commenced on:

XX XX 20XX

Relevant facts and circumstances

The deceased passed away on XX X 20XX.

The property was the deceased main residence at the date of death.

The property was never used for incoming producing purposes.

There was an outstanding mortgage over the property at the date of death.

The beneficiaries attempted to gain finance to pay out the loan but were unsuccessful.

A voluntary surrender of the property was signed, and control was handed to the bank. three years and six months after the deceased's death.

Approximately X years after the deceased's death, the sale of the property was settled.

Relevant legislative provisions

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

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 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 17of 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 understand most of the extension period was due to endeavours by beneficiaries to obtain finance to pay the mortgage on the property. This could not be classified as an exceptional circumstance preventing the sale of the property. Although it was an understandable choice it was nevertheless still a choice by the beneficiaries and not a circumstance outside of their control causing the delay to the sale of the property.

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

•         during the first 2 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 was completed (settled) within 12 months of the dwelling being listed for sale5

•         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.

There was an extensive delay in the voluntary surrender to the bank. Although the deceased estate had minimal assets and the estate was eventually declared insolvent the delay in handing control of the property to the bank was a choice and not an extenuating circumstance.

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