Edited version of private advice

Authorisation Number: 1052181691198

Date of advice: 17 October 2023

Ruling

Subject: Commissioners 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 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 XX XXXX 20YY

The scheme commenced on:

XX XXXX 20YY

Relevant facts and circumstances

The deceased and Person 1 owned the property.

The property was the deceased's main residence.

Person 1 wished to sell the property to receive their equal share in the property.

Person 2 acquired a mortgage against the property in their name and bought Person 1's equal share of the property.

You were diagnosed with cancer in XXXX 20YY and incurred significant expense and loss of wages due to the associated treatments and operations.

The deceased passed away on XX XXXX 20YY.

The deceased's will passed their equal interest in the property to you.

You incurred further financial expense by paying for the deceased's funeral.

Person 2 resided in the property as their principal place of residence before and after the deceased had passed away.

You decided to allow Person 2 to continue residing in the property due to their inability to afford alternative accommodation.

Person 2 was unable to service a second loan to pay out your interest in the property due to a single income and child maintenance costs.

You could not sign as guarantor for a second loan for Person 2 due to your own financial circumstances.

You came to an agreement with Person 2 that you would not receive rent for your portion of the property, and you would also not pay rates or insurance.

Unbeknownst to you, the mortgage payments for Person 2's share of the property had not been met for several months.

On XX XXXX 20YY, the financial institution served you and Person 2 a claim and statement of claim seeking payment for outstanding debts owed under a loan agreement.

The property was sold by you and Person 2 with settlement occurring on XX XXXX 20YY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Summary

The Commissioner will not exercise his discretion under section 118-195 of the Income Tax Assessment Act 1997 to extend the period for disposal as you have not met the relevant criteria for an extension.

Detailed reasoning

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 XX XXXX 19YY, 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 XX XXXX 19YY. After the deceased passed away, their ownership interest in the property was transferred to you as a beneficiary 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 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.

We have considered the sensitivity of your personal circumstances that you have submitted as cause of the delay in sale of the property.

We consider that although there were sensitive personal circumstances, there were no restrictions in place on the ability to sell the property. The property was later sold within two months after the receipt of a statement of claim to initiate proceedings by the financial institution.

Therefore, the delay is attributed to your choice to allow Person 2 to remain in the property as their principal place of residence.

It is clear that the Commissioner's discretion is meant to be limited to situations where the owners are effectively prevented from selling the property.

Having considered the relevant facts, we will not apply the discretion under subsection 118-195(1) of the Income Tax Assessments 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 your share of the property is the market value of that share on the deceased's date of death. You are also entitled to the 50% CGT discount in relation to the property.