Edited version of private advice

Authorisation Number: 1052197991483

Date of advice: 5 February 2024

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.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

XX XX 20XX

Relevant facts and circumstances

The deceased passed away on XX XX 20XX.

The dwelling is located at the property.

The property was the main residence of the deceased before they passed away.

The property remained vacant and wasn't used to produce assessable income from the date of death.

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

The will appointed the executors of the estate.

The will lists the beneficiaries of the estate.

From XX XX 20XX COVID-19 restrictions came into effect.

From XX XX 20XX COVID-19 restrictions eased for people who are fully vaccinated.

From the deceased's date of death, it was discussed that a beneficiary may migrate to Australia to occupy the property. As a result, there was no plan to dispose of the property in the immediate future.

The application for a grant of probate was submitted on XX XX 20XX.

Probate was granted on XX XX 20XX to the executor.

In XX 20XX a beneficiary of the estate was diagnosed with a serious illness. Due to their ill health the disposal of the property was no longer a priority.

In XX 20XX the executor discovered that the beneficiary wouldn't qualify to migrate to Australia via a migration agent.

In XX 20XX a real estate agency was engaged.

The first open house for the property was held in XX 20XX.

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 section 118-195

Reasons for decision

Subsection 118-195(1) of the ITAA 1997 states that if you owned a dwelling that passed to you as a beneficiary of a deceased estate (or in your capacity as the trustee of a deceased estate), then you disregard any capital gain or loss made on the disposal of the property 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 this period in certain circumstances); or

•         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 before the death; or

•         an individual who had a right to occupy the dwelling under the deceased's will; or

•         if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary - that individual.

Generally, we will allow a longer period where the dwelling could not be sold and settled within 2 years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first 2 years.

Factors that would weigh in favour of allowing an extension include the following:

•         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 allowing an extension include the following:

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

•         waiting for 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.

In considering whether to extend the 2-year period, we weigh up all the factors (both favourable and adverse) having regard to the facts and circumstances of the case.

The property sale settled more than 2 years after the deceased's death. Therefore, you require the Commissioner's discretion to extend the 2-year period to be eligible for an exemption.

You have advised from the date of death until XX 20XX yourself and the other beneficiaries made the choice to retain ownership of the property until a decision was made, by one of the beneficiaries, on whether they wanted to proceed with migrating to Australia and, upon doing so, occupy the property. This was the principal reason for the delay in selling the property and subsequent periods of inactivity.

In the evidence you provided you have named lockdown restrictions as the primary reason the property couldn't be disposed of until after the 2-year extension expiration date.

From the date of death, no lockdowns were observed for a period of X months in your state. The subsequent lock down period placed no restrictions on applying for a grant of probate. The application for grant of probate was submitted approximately 1 year from the date of death. Once the probate application was submitted it was processed in a timely manner. This suggests that the delay in applying for the probate was material to the delay in disposing of the property rather than the lockdown period.

Once the probate was granted to you as the executor a period of inactivity followed. You explained in your correspondence with us that you were unaware of the legislative requirement to dispose of the property within 2 years of the date of death and as a result there was no urgency surrounding the disposal of the property. We do not consider this a favourable factor when deciding to exercise the Commissioners discretion to extend the 2-year disposal period.

In XX 20XX one of the beneficiaries was diagnosed with a serious illness and as a result the disposal of the property was no longer a priority. We recognise that from this point onwards it was more important to focus on your family member as a priority rather than the disposal of the property however we do not consider this to have contributed to the material delay prior to this point.

Having considered the relevant facts, the Commissioner will not apply the discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the 2-year time limit. Therefore, the normal CGT rules will apply to the disposal of the property. You should note that the first element of the cost base for the property is its market value on the deceased's date of death. You are also entitled to the 50% CGT discount in relation to the property.