Edited version of private advice

Authorisation Number: 1052194090387

Date of advice: 28 November 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise his discretion to extend the 2-year period to dispose of the dwelling acquired from a deceased estate under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The property was acquired by the deceased on DDMMYYYY.

The deceased passed away on DDMMYYYY.

The property was less than 2 hectares.

The dwelling was the deceased's main residence up until their date of passing.

The property was not used for the purpose of producing assessable income.

The property was not the main residence for any beneficiary under the will after the date of death.

The property was vacant from the deceased's death until it was sold.

A contract of sale on the property was executed on DDMMYYYY and the property settled on DDMMYYYY.

The deceased died unexpectantly while travelling overseas and the family had to engage assistance to arrange an autopsy, cremation and burial arrangements. This caused a delay in returning the deceased's personal belongings including the key to the property.

It took XX months to determine the validity of the will and issue the Grant of Probate which occurred on DDMMYYYY.

The will was challenged in MMYYYY and took X months to settle.

The executor of the deceased estate appointed an agent to sell the property. At the time there were XX dwellings for sale and as the deceased's property was on a large lot it attracted less demand.

The executor of the Estate resided in a different State of Australia to the location of the property.

The COVID lockdown in the different States resulted in travel being restricted to 5km from home and prevented interstate travel. At this time the real estate agents communicated by phone that there were no people interested in buying the property as they were unable inspect the property due to the COVID restrictions. It also meant the property could not be visited to be prepared for sale.

The X River flooded in MMYYYY and impacted the property causing it to be an isolated island due to the levee banks. The area around the house was sodden, delaying the process of sale for another 4 months.

The only potential purchaser who expressed interest in the property, took X months to make an offer, then took a further X months from the time of their offer to get financial approval for the purchase.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Summary

The Commissioner will exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension of time to the two-year period for you to dispose of the dwelling acquired from a deceased estate and disregard the capital gain or capital loss you made on the disposal.

Detailed reasoning

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Part 3-1 provides that a capital gain arises where a capital gains tax (CGT) event occurs and the amount the taxpayer receives exceeds the total costs associated with that CGT event. A capital loss can occur where the amount the taxpayer receives is less than the reduced cost base of the CGT asset.

A capital gain or capital loss may be disregarded under section 118-195 where a CGT event happens to a dwelling you acquired from a deceased estate if:

•                     you are an individual who is a beneficiary or trustee

•                     the property was acquired by the deceased before 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 being used for the purpose of producing assessable income,

and

•                     your ownership interest ends within 2 years of the deceased's death or within a longer period allowed by the Commissioner

•                     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 be death

-        an individual who had a right to occupy the dwelling under the deceased's Will, or

-        the individual to whom the ownership interest is transferred as a beneficiary and is then sold by that individual.

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. Your ownership interest ended at the time of settlement of the contract of sale.

As you did not dispose of your ownership interest within two years of the deceased's passing, you do not satisfy the conditions to be eligible for an exemption under section 118-195 unless the Commissioner's discretion to extend the two-year period is exercised.

Commissioner's discretion

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 outlines the factors that the Commissioner will consider when determining whether or not to exercise their discretion to extend the two year period under section 118-195.

Paragraph 3 of PCG 2019/5 provides that the Commissioner will allow a longer period where the sale of the dwelling could not be settled within two years of the deceased's death due to reasons beyond your control.

Paragraph 14 of PCG 2019/5 explains that the Commissioner weighs up all the factors both in favour and against the granting of the discretion.

Paragraph 12 of the PCG 2019/5 outlines the circumstances in which the Commissioner may exercise the discretion in extending the two-year period where they take more than 12 months to resolve:

12. One or more of the following circumstances must have taken more than 12 months to address:

•                     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.

Paragraph 13 of the PCG 2019/5 outlines the circumstances in which the Commissioner will not exercise his discretion in extending the two-year period as they cannot be material to delays in disposal of the dwelling:

13. In order to qualify for the safe harbour, none of the following circumstances can have been material to the delay in disposing of your interest:

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

•                     delay due to 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.

Paragraph 17 of PCG 2019/5 provides a list of other factors that may be relevant to the exercise of the Commissioner's discretion:

17. Other factors that may be relevant to the exercise of our discretion (but are not relevant for the safe harbour) include but are not limited to:

•                     the sensitivity of your personal circumstances and of other surviving relatives of the deceased

•                     the degree of difficulty in locating all beneficiaries required to prove the will

•                     any period that the dwelling was used to produce assessable income, and

•                     the length of time you held the ownership interest in the dwelling.

PCG 2019/5 provides an example of the safe harbour where there is more than one circumstance that leads to the delay in disposal of the property:

Example 10 - safe harbour - more than one circumstance

52E. Mr Smith acquired his main residence after 20 September 1985. Mr Smith died in April 2019. Mr Smith's will provided that the dwelling pass to his adult children.

52F. The children listed the dwelling for sale in June 2019 but were immediately approached by a neighbour claiming that the driveway and part of the garage were occupying the neighbour's property. The children withdrew the dwelling from sale until the issue could be resolved.

52G. In April 2020, the issue with the neighbour was resolved. The dwelling was relisted for sale.

52H. In July 2020, COVID-19 restrictions came into effect, including a lockdown and limits on real estate viewings and auctions. There was very little interest in the dwelling during the lockdown and no offers were received.

52I. In December 2020, the lockdown was lifted and restrictions on real estate sales removed. In April 2021, the property sold, with a settlement occurring in June 2021.

52J. Because the delay in disposing of the property was caused by the complexity in administration of the deceased estate (10 months) and the impact of COVID-19 measures (5 months), and they took longer than 12 months to resolve in total, the children can rely on the safe harbour.

Application to your circumstances

In your case, you had 2 years from the date of death DDMMYYYY, to dispose of the property, however, the transfer only happened on DDMMYYYY.

The disposal was initially delayed in the first two years due to the following:

•                     the complexity of the deceased estate caused by the unexpected passing of the deceased while travelling overseas and initially there was no access to the key for the house

•                     the difficulty in locating the witness to the will

•                     it took XX months to determine the validity of will and the issue of the grant of probate

•                     the will was challenged

•                     attempts to sell the house were unsuccessful

•                     lockdowns due to COVID impacted on open inspections and ability to cross the border

Then further delays were caused by:

•                     continual lockdowns due to COVID and the impact of these on open inspections and ability to cross the border

•                     the property was listed for sale and no offers were received

•                     the X River flooding affected access to the property

•                     the contract of sale was delayed X months while the only potential purchaser got their finance approved.

These reasons were largely outside the control of the trustee and they significantly affected the overall delay in disposing of the property. Like example 10 in PCG 2019/5, the cumulative effect of the various factors resulted in a delay that took over 12 months to address.

While there were periods where the property market was flat and repairs to improve saleability of the property were recommended, you did not wait for the property market to pick up. These issues happened to coincide with other factors that were outside of your control, and they were not a material cause of the delay in disposing of the property.

Having considered your circumstances and the relevant factors set out in the PCG 2019/5, the Commissioner will apply the discretion under subsection 118- 195(1) to allow an extension to the two-year time limit because on balance, the favourable factors that exist outweigh any adverse factors that exist.

Accordingly, the sale of the dwelling will be exempt from CGT pursuant to section 118-195.