Edited version of private advice

Authorisation Number: 1052199016652

Date of advice: 30 November 2023

Ruling

Subject: Commissioner's discretion - deceased estates

Question 1

Will the Commissioner exercise the discretion under section 118-195 of the Income Tax Assessments Act 1997 (ITAA 1997) to allow an extension of time for the Trustee of the Estate of Person 4 to dispose of their ownership interest in the property and disregard the capital gain or capital loss made on the disposal?

Answer

Yes.

Question 2

Will the Commissioner exercise the discretion under section 118-195 of the ITAA 1997 to allow an extension of time for Person 5 and Person 6 to dispose of their ownership interests in the property acquired from Person 2's estate and disregard the capital gain or capital loss made on the disposal?

Answer

Yes.

Question 3

Will the Commissioner exercise the discretion under section 118-195 of the ITAA 1997 to allow an extension of time for Person 5 and Person 6 to dispose of their ownership interests in the adjacent land acquired from Person 2's estate and disregard the capital gain or capital loss made on the disposal?

Answer

No.

This ruling applies for the following period:

Year ended XX XXXX 20YY

The scheme commenced on:

XX XXXX 20YY

Relevant facts and circumstances

Person 1 acquired land and constructed a dwelling pre-CGT. Later Person 1 undertook a subdivision into two lots, a lot on which the dwelling was located ('the property') and an 'adjacent land' lot.

Person 1 transferred ownership of the adjacent land to Person 2 and Person 3 in equal shares.

There is no fence separating the property and the adjacent land. The adjacent land has always been used as the property's backyard. The total area of the two lots is less than two hectares.

On XX XXXX 19YY, Person 3 passed away and their equal interest in the adjacent land passed to Person 2.

On XX XXXX 19YY, Person 4 and Person 2 both acquired equal shares of interest in the property after Person 1's passing.

Person 4 used the property as their main residence throughout their ownership period. Person 2 also used the property as their main residence prior to their death.

On XX XXXX 20YY, Person 2 passed away and their estate transferred its equal share in the property and its 100% ownership interest in the adjacent land to Person 5 and Person 6.

Person 4 possessed a life tenancy in the property as described within the property's title instrument.

The adjacent land had no life tenancy entitlement.

On XX XXXX 20YY, Person 4 passed away.

Person 4's will appointed Person 5 and Person 6 to be executors of their estate.

Person 5 became severely ill. They required surgery and were hospitalised for several weeks. They were off work for months and then required many months of further rehabilitation.

As Person 5 was a co-executor and also possessed their own separate ownership interest in the property, the decisions relating to the property were delayed until their recovery.

In XXXX 20YY, Person 5 and Person 6 settled on a real estate agent and began marketing discussions.

The contract for the property and adjacent land was signed on XX XXXX 20YY and settlement occurred on XX XXXX 20YY, less than 6 months after the expiry of the two-year period in relation to Person 4's death.

The property remained vacant after Person 4 passed away and remained vacant up until the date of settlement.

The property and adjacent land were sold together.

The property and adjacent land had not been used to produce income.

Relevant legislative provisions

Income Tax Assessments Act 1997 section 118-195

Reasons for decision

Question 1

Will the Commissioner exercise the discretion under section 118-195 of the Income Tax Assessments Act 1997 (ITAA 1997) to allow an extension of time for the Trustee of the Estate of Person 4 to dispose of their ownership interest in the property and disregard the capital gain or capital loss made on the disposal?

Summary

Yes.

Having considered your circumstances and the relevant factors the Commissioner will allow an extension of time. Further information about the Commissioner's discretion can be found by searching ato.gov.au for 'QC 66057'.

Question 2

Will the Commissioner exercise the discretion under section 118-195 of the ITAA 1997 to allow an extension of time for Person 5 and Person 6 to dispose of their ownership interests in the property acquired from Person 2's estate and disregard the capital gain or capital loss made on the disposal?

Summary

Yes.

Having considered your circumstances and the relevant factors the Commissioner will allow an extension of time.

Question 3

Will the Commissioner exercise the discretion under section 118-195 of the ITAA 1997 to allow an extension of time for Person 5 and Person 6 to dispose of their ownership interests in the adjacent land acquired from Person 2's estate and disregard the capital gain or capital loss made on the disposal?

Summary

No.

The Commissioner will not exercise his discretion under section 118-195 of the ITAA 1997 to extend the period for disposal as the relevant criteria has not been met.

Detailed reasoning

A capital gain or capital loss may be disregarded under section 118-195 of the ITAA 1997 where a capital gains tax event happens to a dwelling if it passed to you as a beneficiary of a deceased estate or you owned it as the trustee of the deceased estate. Generally, your ownership interest in the dwelling has to end within two years of the deceased's death for the exemption to apply.

The sale of the adjacent land was settled more than two years after Person 2's death. Therefore, the Commissioner's discretion is required to extend the two-year period to be eligible for a full 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 was due to reasons beyond your control.

We consider that there was no impediment to the sale of the adjacent land, in contrast with the property which was subject to a life tenancy. It is clear that the Commissioner's discretion is meant to be limited to situations where the owner is effectively prevented from selling the property.

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 adjacent land. Please note, a 50% CGT discount is applicable to the disposal of the adjacent land.