Edited version of private advice

Authorisation Number: 1052194605486

Date of advice: 21 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 (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. The Commissioner will not exercise his discretion under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to the two-year period relating to the disposal of the property. The trustee/beneficiaries of the deceased estate are not exempt from tax on any capital gain made on the disposal of the property pursuant to section 118-195 of the ITAA 1997.

Further information about the Commissioner's discretion can be found by searching ato.gov.au for 'QC 66057'.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away on DD MM 20YY.

The dwelling is located at XXXX (the property).

The deceased acquired the property after 20 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 in MM 20YY.

You and your sibling made multiple trips to the property to prepare it for sale. You and your sibling live in a different state to that of the property.

The property contract date was in MM 20YY, with settlement occurring on DD MM 20YY.

The property was not used to produce assessable income at any time after the deceased passed away.

COVID lockdowns were in place during the following periods in Victoria:

•         Lockdown 1 - DD MM 20XX to DD MM 20XX

•         Lockdown 2 - DD MM 20XX to DD MM 20XX

•         Lockdown 3 - DD MM 20XX to DD MM 20XX

•         Lockdown 4 - DD MM 20XX to DD MM 20XX

•         Lockdown 5 - DD MM 20XX to DD MM 20XX

•         Lockdown 6 - DD MM 20XX to DD MM 20XX

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

In certain circumstances, section 118-195 of the ITAA 1997 provides that the trustee/beneficiary of a deceased estate may disregard an assessable gain or loss made from the disposal of a property that passed to them in their capacity as trustee/beneficiary of a deceased estate 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 the two-year time period where the trustee or beneficiary of a deceased estate's ownership interest ends after two years from the deceased's death. Practical Compliance Guideline PCG 2019/5: The Commissioner's discretion to extend the two-year period to dispose of dwelling acquired from a deceased estate outlines the factors that the Commissioner will consider when determining whether to exercise his discretion to extend the two-year period under section 118-195 of the ITAA 1997. This discretion may be exercised in situations such as where:

•         the ownership of a dwelling or the will is challenged

•         a life or other equitable interest given in the will delays the disposal of the dwelling

•         the complexity of a deceased estate delays the completion of administration of the estate

•         settlement of the contract of sale of the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control

•         restrictions on real estate activities imposed by a government authority in response to the COVID-19 pandemic

These examples are not exhaustive. They provide guidance on what factors the Commissioner would consider reasonable to exercise his discretion to extend the two-year period.

PCG 2019/5 also outlines factors that would weigh against the Commissioner allowing a longer period. Some factors include 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.

Whether the Commissioner will exercise his discretion under subsection 118-195(1) of the ITAA 1997 will depend on the facts of each case.

Application to your circumstances

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.

In this case the Commissioner has decided not to exercise his power to extend the two year period available to the trustee of the deceased estate to dispose of the property for the purposes of section 118-195 of the ITAA 1997.

We also considered the following additional factors which contributed to the delay in disposing of the property:

•         The property was located in a different state from where you reside, and your ability to travel to the property was hindered by border closures as a result of the COVID-19 pandemic.

•         Between MM 20YY (when the property could be prepared for sale after allowing for probate to be finalised) and MM 20YY when the property was listed for sale, there was a total time period of approximately XX months during which there were no lockdowns in place. Whist some of the periods between these lockdowns were relatively short, there were lengthy periods where COVID restrictions/lockdowns were not in place.

•         You have not shown that it was actually COVID-19 restrictions on real estate activities imposed by a government authority that caused the delay.

•         The information and documentation provided does not support that the deceased's estate was of a complex nature. Therefore, this is not a factor that the Commissioner would take into consideration when making the decision on whether or not to exercise the discretion to extend the two-year period to dispose of the property.

•         The delay in the disposal of the property was not due to any legal impediment, but as a result of the actions and choices of the Executor of the deceased's estate.

•         There was no challenge to the deceased's will.

•         While we appreciate you wanted to bring the property to a reasonable condition for sale, the fact that you were unable to visit the property for extended periods of time due to your and your sisters availability, this does not change the fact that you could have engaged someone else to complete any repairs and/or preparing the property ready for sale.

•         The property was unsafe to stay in as the deceased had begun hoarding items and there was also a concern of mould, dirt, insects and pests, animal faeces, a leaking roof, and external doors that do not shut, so accommodation in surrounding areas (such as in a caravan park, or with other family members) was required. The number of items the deceased had in their possession required 9 large skip bins to ensure the items were disposed of.

•         You attempted to engage family who live in the area of the property to assist you with going through the contents of the property and maintaining the yard during periods you couldn't visit the property; however they were unable to assist due to age, injury, or illness. This does not change the fact that you could have engaged someone else to complete any repairs and/or preparing the property ready for sale.

•         The utilities of the property (such as electricity) could not be connected due to the cost, so in summer the property would become hot because no air conditioning was available without the electricity connected. The Commissioner does not consider this to be an exceptional circumstance that would be acceptable to delay the sale of the property.

Based on the information and documentation provided with this private ruling it has been determined that the Commissioner's discretion will not be exercised to extend the two-year period as there was a significant period of delay in disposing of the property that was not outside of the control of the executor.

As the Commissioner has not exercised the discretion to extend the two-year period to dispose of the deceased's inherited property, 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.