Edited version of private advice

Authorisation Number: 1052182073667

Date of advice: 7 November 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 dwelling and disregard thecapital gain or capital loss you made on the disposal?

Answer

No

This ruling applies for the following period:

Year ending XX XX 20XX

The scheme commenced on:

XX XX 20XX

Relevant facts and circumstances

The deceased passed away on XX XX 20XX.

At their passing, the deceased together with their spouse owned a property as tenants in common, acquired prior to 20 September 1985.

The property was the deceased's main residence and was not used for income producing purposes at any time.

The deceased lived in the property with their spouse.

The property is approximately less than 2 hectares.

The spouse was given their share of the property, as per the deceased's Will.

The spouse was appointed sole executor and trustee.

On XX XX 20XX, the deceased's spouse passed away prior to the deceased's estate being finalised.

After the spouses passing, the property was sold on XX XX 20XX.

The property settled on XX XX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

These reasons for decision accompany the Notice of private ruling for The Executor For XX XX.

This is to explain how we reached our decision. This is not part of the private ruling.

IssueCommissioner's discretion - deceased estate

Summary

The Commissioner will not exercise their 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 disposal.

Detailed reasoning

Subsection 118-195(1) of the Income Tax Assessment Act 1997 states that if you owned a dwelling that passed to you as a beneficiary of a deceased estate (or in your capacity as the trustee of a deceased estate), then you disregard any capital gain or loss made on the disposal of the property if:

•            the property was acquired by the deceased before 20 September 1985; or

•            the property was acquired by the deceased 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 (the Commissioner has discretion to extend this period in certain circumstances); or

•            the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of:

•            the spouse of the deceased immediately before the death; or

•            an individual who had a right to occupy the dwelling under the deceased's will; or

•            if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary - that individual.

Generally, we will allow a longer period where the dwelling could not be sold and settled within 2 years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first 2 years.

Factors that would weigh in favour of allowing an extension include the following:

•            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.

Factors that would weigh against allowing an extension include the following:

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

•            waiting for 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.

In considering whether to extend the 2-year period, we weigh up all the factors (both favourable and adverse) having regard to the facts and circumstances of the case.

The property sale settled more than 2 years after the deceased's death. Therefore, you require the Commissioner's discretion to extend the 2-year period to be eligible for an exemption.

The delay was attributable to the deceased's estate not being finalised, and therefore the spouse not officially owning the deceased's share of the property prior to his subsequent passing, and therefore prior to the sale of the property.

Having considered the relevant facts, the Commissioner will not apply the discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the 2-year time limit. Therefore, the normal CGT rules will apply to the disposal of the property. You should note that the first element of the cost base for the property is its market value on the deceased's date of death. You are entitled to the 50% CGT discount in relation to the property.

You may find the following reference useful:

QC 66055 Calculating CGT with a partial exemption

Partial exemption

Where a full exemption is not available the client may be entitled to a partial exemption under section 118-200 of the ITAA 1997.