Edited version of private advice

Authorisation Number: 1052188104712

Date of advice: 10 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 property 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/XX/20XX

The scheme commenced on:

XX/XX/20XX

Relevant facts and circumstances

The deceased passed away on XX/XX20XX.

The dwelling is located at XXX (the Property)

The property was the main residence of the deceased just before they passed away and was not used to produce income at that time.

At the time of the Deceased's death, one of their children (also a beneficiary) was living with them at the property and continued to do so for some time after.

This beneficiary had requested to stay at the Property for a period post the Deceased's passing, which the other beneficiaries agreed to.

On XX/XX/20XX, the Executor received signed grant of probate.

On XX/XX/20XX a contract of sale was signed on the property, with settlement occurring on XX/XX20XX.

The property was situated on less than two hectares of land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

Section 118-195 of the ITAA 1997 disregards capital gains and capital losses made from certain CGT events that happen in relation to a dwelling that:

The property was a deceased person's main residence and was not being used to produce assessable income just before they died, or

The property was acquired by the deceased before 20 September 1985.

The Deceased was living in the property at time of death, and it was not being used to produce assessable income.

If you dispose of an ownership interest in a dwelling that passed to you as an individual beneficiary or as the trustee of the deceased's estate within 2 years of the deceased's death, any capital gain or loss you make on the disposal is disregarded. The Commissioner has the discretion to extend the 2-year period.

In your case the Deceased acquired the property jointly with their spouse before 1985, and upon their passing, their share of the Property was transferred to the Deceased more recently.

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 delay in the sale of the dwelling was due to reasons beyond your control.

Paragraph 14 of PCG 2019/5 explains we weigh up all of the factors (both favourable and adverse).

Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example:

•         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 the granting of the discretion include:

•         Waiting for the property market to pick up before selling the dwelling.

•         Property used to earn assessable income.

•         Renovations or other activities designed to increase the sale price, or

•        Unexplained periods of inactivity by the executor in attending to the administration of the estate.

The above examples are not exhaustive.

In your case, you ultimately made a choice to retain the property for a longer period to allow one of the beneficiaries (the beneficiary) to remain living in the property, and we consider that this was the main cause of the delay in selling the property.

As such, we also consider that this was within your control, and is not something which is a factor weighing towards exercising the discretion.

In addition, you have not identified any other factors that prevented you from selling the property whilst the beneficiary was living in the property.

You also contend that the beneficiary who resided in the Property after the Deceased's death, although without the legal standing, would identify as a life tenant.

ATO ID 2003/109 states that:

An individual would be considered to occupy a dwelling under the deceased's will if it was in accordance with the terms of the will. This would also be the case if it was in pursuance of the will or under the authority of the will (see Evans v. Friemann (1981) 53 FLR 229 at 238).

In this case, the beneficiary had no right under the will to reside in the house. The beneficiary resided in the house because the executors and other beneficiaries so agreed.

This outcome is consistent with the general rule of construction that the intent of the deceased must be ascertained from the words of the will and that one cannot speculate or guess after that intention. (see Certoma, GL 1987, The Law of Succession in New South Wales, The Law Book Company, Sydney, p. 117.)

As the beneficiary did not have a right to occupy the dwelling under the will, the trustee cannot disregard the capital gain made on the disposal of the dwelling.

Comparisons can be made between your circumstances, and the circumstances set out in ATO ID 2003/109, as in your case, the beneficiary also did not have a right to occupy the dwelling under the Will.

As such, you will not be entitled to the exemption under item 2(b) in the table in subsection 118-195(1) of the ITAA 1997.

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. The cost of renovations can also be included in the cost base of the property. You are also entitled to the 50% CGT discount in relation to the property.