Edited version of private advice

Authorisation Number: 1052189956521

Date of advice: 7 November 2023

Ruling

Subject: Commissioner discretion - deceased estate

Question

Will the Commissioner exercise the discretion under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 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 ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away on XX/XX/20XX.

The deceased owned a property that was acquired after 19 September 1985.

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

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

Probate was granted on XX/XX/20XX.

The executors of the deceased estate were Person A, Person B and Person C.

The beneficiaries of the estate were Person A, Person B, Person C and Person D and Person E.

The deceased's will outlined that part of the property, consisting of the house and the surrounding land was to be bequeathed to Person C who was living at the property at the time of the deceased's death and continued to reside at the property after the deceased passed away. The use of this portion of the property was to be for Person C's own use and benefit.

The deceased's will also outlined that the balance of the property was to be given to the executors upon trust to sell, call in and convert the same into money and after payment of all debts and funeral expenses and expenses associated with the administration of the estate.

The residue of the estate was to be divided equally amongst the beneficiaries of the estate. Person E's share was to be divided amongst their children.

Following the deceased's death, Person A contacted their accountants and advisors for them to outline the tax implications of an intended property transfer upon the death of the deceased. On XX/XX/20XX, advice was provided regarding administering the property. The executors of the estate were not aware at the time that an inherited property must be sold within two years from the date of death to be exempt from capital gains tax.

Between 20XX to 20XX, Person E made a claim to the estate due to not being included in the will of the deceased in favour of their children. Person E met with their children on several occasions, however no resolution was met. On XX/XX/20XX, Person E verbally stated that they would not contest the will. In early 20XX, Person E was diagnosed with an illness and subsequently passed away on XX/XX/20XX. Person A and Person C were appointed as executors of Person E's estate and commenced selling Person E's assets.

The executors sought to administer the estate according to the terms in the deceased's will which involved subdividing the property. The executors experienced several difficulties in attempting to pursue this.

The executors discovered that the property's surrounding land was listed as a local council heritage site which placed restrictions on how the land could be subdivided.

To consider subdividing the house block, a development process was undertaken to subdivide the portion of the land for Person C's use and benefit and to sell the remaining portion of land. Several reports were conducted which included arborists reports, soil and contamination reports, a statement of environmental effects and heritage reports. Surveys were also undertaken. Installation or services and utilities were also required which included piping and cables, which were to be funded by the estate.

In 20XX, Council A (the council) recommended that a Heritage Impact Statement was obtained, which was a requirement to subdivide the property. A heritage architect was consulted and advised that the cottage located on the house block was heavily compromised. The heritage consultant advised that a development application was required for a report to be addressed to. The heritage consultant also recommended that a town planner be appointed to advise how the development incorporated heritage within the planning goals of the council.

Between 20XX and 20XX, Person D requested the early release of entitlements prior to the administration of the estate and requested a buyout figure higher than market value. In 20XX, Person D threatened legal action to remove the executors. A partial distribution of the estate was not completed.

Due to the location of the property, utilities along the road in which the property was located on were required to be connected prior to the completion of the subdivision.

Several rezoning proposals and zoning uncertainty further complicated the issue of subdividing the property and the installation of utilities. Between 20XX to 20XX, several changes took place, whilst maintaining existing road access to a classified road.

The council required Organisation A to grant approval for continued driveway access to the road that the property was situated on prior to proceeding with a development application.

Negotiations with Organisation A and discussions with a local member of parliament regarding continued access to the road and driveway access to the property lasted for several months. A discussion was also necessary with Organisation B. Organisation A granted driveway access to the roads via the two existing driveways on XX/XX/20XX.

Access to the road was granted in a low-density zoning area. State planning authorities were planning to rezone the area in which the property was located to a medium density area. This created further uncertainty as to whether the approval for the continued driveway access would still be valid with the proposed change in zoning.

From 20XX to 20XX, discussions were required with Organisation C regarding maintaining the existing driveway access into the road the property was situated on.

In XX/20XX, a heritage statement was obtained.

In XX/20XX, the executors were prepared to submit a development application, however an application was submitted for a neighbouring property. The application had the potential to interfere with the easements located on the property and encroached the boundaries of the property. The development application required review due to the potential risks that the application posed to the property.

Organisation D also released plans for the precinct the property was located in. These plans required further review.

In 20XX, a town planner advised that a submission of a heritage report be made to inform state planners as to the heritage significance to the estate. This was not pursued due to the property being approached by potential buyers.

The deceased was a beneficiary of the estate of the deceased's relative who passed away in 20XX intestate. This estate was managed by Organisation E. There was some difficulty in locating the deceased's relative's relatives and in 20XX, the estate was notified of being a beneficiary of this estate. The executors of the estate needed to spend some time attending to this estate.

In November 20XX, the spouse of Person A underwent a medical procedure and required ongoing support from Person A. Person A's spouse made a full recovery in mid-20XX.

In 20XX, the council released a statement which further identified the property's heritage listing which resulted in development restrictions on the property. It was discovered that the entirety of the property, inclusive of the house block and the remaining land was identified as a heritage listed item.

The council was interested in preserving the cottage, however no further considerations could be made until a development application was presented. Many reports were required to be obtained prior to submitting a development application.

The executors discovered that there were considerable difficulties in removing the property's heritage listed status.

It was decided that instead of pursuing an application to subdivide the property, the property would be sold as a single plot of land due to the significant costs and resources involved to subdivide the property and the uncertainty of council approval processes, particularly the heritage listing of the property.

In 20XX and 20XX, the executors investigated the removal of the property from the heritage list, however this was not advised by heritage consultants due to the high costs and time required.

Lawyers were consulted to investigate the removal process of a heritage listing; however, the executors were advised that there were low prospects of success.

Several offers were made on the property, however due to the restrictions imposed on how the land could be developed, processing these offers was complex and time consuming.

A concern when finding prospective buyers of the property was to obtain an amount that would be adequate to allow Person C to purchase another property to live in as the property was no longer going to be subdivided.

You contend that the Covid-19 pandemic placed significant restrictions on real estate services.

You entered into a contract to sell the property on XX/XX/20XX with settlement occurring on XX/XX/20XX.

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 and certain conditions are satisfied.

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 consider as favourable factors, that the property was used as the deceased's main residence and was not used for income producing purposes.

We considered that you were not initially advised by your previous financial advisors of the requirements to dispose of a property within two years of the deceased's date of date to be exempt from capital gains tax. Ignorance of the law or inadequate advice received would not be considered a favourable factor when exercising a discretion.

We also considered that the deceased's will stated that the property was to be subdivided and the dwelling and surrounding land was to be used for a beneficiaries use and benefit. We acknowledge the difficulties that were experienced in subdividing the property, particularly due to the heritage listed status of the property, however the conditions outlined in the deceased's will did not prevent the sale of the property and the property could have been sold as a single plot of land sooner following the deceased's death.

We also considered the many other events that occurred from the time of the deceased's death until the property was sold. These include the challenge to the will by Person E and them later passing away, Person D requesting the early release of entitlements prior to the administration of the estate, the issue the estate being notified that it was a beneficiary of the deceased's relative's estate and the spouse of Person A's medical procedure. Although these events were unfortunate and significantly affected the individuals involved, these events were not directly related to the property itself and would not have impacted the sale.

You wished to obtain a sufficient amount of money for the property to allow Person C to purchase property. The PCG 2019/5 does not allow for waiting for a suitable buyer or for a certain purchase amount before a property is sold.

You stated that the Covid-19 pandemic placed significant restrictions on real estate services. It should be noted that the deceased passed away in 20XX and the Covid-19 pandemic became prevalent in Australia in early 20XX. Properties were also still able to be sold during this time.

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 repairs 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.