Edited version of private advice

Authorisation Number: 1052182833254

Date of advice: 27 October 2023

Ruling

Subject: Commissioner's discretion - extension

Question 1

Will the Commissioner exercise his discretion under subsection 118-195(1) of Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension of the two-year period for the disposal of the property?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

XX October 20XX

Relevant facts and circumstances

Individual A passed away XX December 19XX.

Individual A owned a rural property which included their main residence (the property).

Probate for Individual A's will was granted to their spouse, Individual B, on XX June 19XX. Their will provided a life interest in the property to Individual B and the remainder to their child, Individual C.

Individual C lived in the property from February 19XX until their death on XX October 20XX. Pursuant to an agreement with Individual B.

Individual B passed away on XX September 20XX. Probate of their will was granted to their child on XX December 20XX.

Following Individual C's death, one of the executors, their child, Individual X, was given legal advice that it was not necessary at that time to obtain probate. The other executor, another child, Individual Y, occupied the property and refused to co-operate in relation to a grant of probate and the administration of Individual C's estate.

On XX June 20XX Individual X obtained new legal advice and was immediately advised to obtain probate. They instructed the law firm to apply for probate, and draft documents were prepared in July 20XX.

Individual Y refused to co-operate with Individual X to obtain a grant of probate and denied access to the property to complete inventory. Individual Y obtained their own legal representation for the administration of Individual C's estate.

A dispute arose between Individual X and Individual Y.

On XX November 20XX, Individual X filed a notice of intention to apply for probate in their own name reserving to Individual Y the right to apply for probate at a later date.

Negotiations and discussions continued for the next several months.

On or about XX June 20XX Individual X filed a summons for probate in the Supreme court.

On XX September 20XX, probate was granted to Individual X.

Individual Y continued to refuse access to the property.

On XX December 20XX Individual Y filed a summons in the Supreme court seeking to revoke the grant of probate and have Individual X removed as trustee.

On XX April 20XX the Supreme Court proceedings were resolved in favour of Individual X at mediation. The terms of settlement were recorded in a Heads of Agreement.

On X June 20XX a deed of family arrangement was exchanged.

In terms with these arrangements, Individual X was given access to the property from XX May 20XX.

A real estate agent was appointed to market and sell the property on XX May 20XX.

A contract of sale was exchanged on XX October 20XX. At this time, a creek on the property was heavily polluted with domestic waste from the property and surrounding properties.

The local Council issued Individual C's estate with a notice to clean up the creek pollution. The contract of sale included a special condition regarding the clean up.

The year 20XX was a very wet year and caused flooding that restricted access to the creek to clean the rubbish and contamination. This was resolved in February 20XX.

The property settled XX February 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 - section 118-195

Reasons for decision

The Commissioner's discretion to extend the two-year period under section 118-195

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 September 19XX, 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 September 19XX. 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 13 of PCG 2019/5 provides the factors that would weigh against us allowing a longer period.

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 consider as favourable factors:

•         The property was subject to a life interest and the property couldn't be sold until Individual B's passing.

•         Legal challenges arose between the two executors during the process of obtaining probate of Individual C's estate.

•         Weather conditions impacted the property clean up and delayed settlement of the property.

However, we also considered how the probates for the Estates of Individual A and B were granted close to their passing and did not prevent any further delay outside the control of Individual C's executors to dispose the property.

There are significant unexplained periods of inactivity by the executors in attending to the administration of Individual C's estate. The executors waited a further X years after Individual C's death (which was also X years after the death of the life interest holder) to seek advice and a grant of probate.

These factors weigh against us allowing a longer period, particularly as the periods of inactivity were material to the delay in disposing the property (paragraph 13 of PCG 2019/5).

Having considered the relevant facts, we will not apply the discretion under subsection 118-195(1) of the ITAA 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 the property is its market value on the deceased's date of death. Other amounts from the remaining elements of the cost base may be included. You are also entitled to the 50% CGT discount in relation to the property.