Edited version of private advice

Authorisation Number: 1052200209365

Date of advice: 13 December 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question 1

Will the Commissioner exercise the discretion under section 118-195 of 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.

Question 2

Are you entitled to a partial main residence exemption in relation to the sale of the Property?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 202X

The scheme commenced on:

1 July 202X

Relevant facts and circumstances

The deceased passed away on XX/20XX.

As at the date of death, the deceased owned the dwelling the property.

The property had been purchased by the deceased prior to 20 September 1985 and was less than 2 hectares in size.

As at the date of death, the property was also the main residence of the deceased's spouse (the spouse). The property continued to be the main residence of the spouse until she passed away several years later.

The Deceased and the spouse were survived by four children between them: Beneficiary A, Beneficiary B, Beneficiary C and Beneficiary D.

Following the death of the deceased, Beneficiary A moved into the property.

Shortly after the death of the spouse, Beneficiary A and Beneficiary B lodged an application for a grant of letters of administration for the spouse's estate and mistakenly listed the property as an asset of the estate.

Several months later, letters of administration for the spouse's estate were issued to Beneficiary A and Beneficiary B (the spouse's administrators).

There was disharmony between the children and the spouse's administrators.

In XX 202X, legal representatives for Beneficiary B and Beneficiary C wrote to Beneficiary A seeking particulars about the steps that had been taken to call in the assets of the spouse's estate.

In XX 20XX, Beneficiary A advised that as part of the administration of the spouse's estate, it had been identified that the spouse had never had an ownership interest in the property, title to the property had not passed to the spouse upon the death of the deceased, and therefore the property was not an asset of the spouse's estate.

In XX 20XX, Beneficiary C instructed lawyers to apply for a grant of letters of administration for the deceased estate (the deceased's administrator). This process was complicated by the fact that the spouse was the deceased's second wife and Beneficiary D was under the care of a guardian. The application was lodged in XX 20XX and the letters of administration were issued in XX 20XX.

In XX 20XX the deceased's administrator lodged a transmission application for the property and commenced negotiations with Beneficiary A regarding delivery up of the property.

In XX 20XX, following unsuccessful requests to Beneficiary A to vacate the property, a claim for recovery of possession of the property was lodged in the Magistrates Court by the deceased's administrator. This order was granted in XX 20XX.

Between XX to XX 20XX, the dwelling was prepared for sale which involved substantial cleaning efforts and the removal of significant amounts of rubbish.

In June 20XX, the deceased's administrator signed an agency agreement with a real estate agent and listed the property for sale. A contract for sale was entered on XX XX 20XX with settlement occurring on XX XX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 118-195(1)

Income Tax Assessment Act 1997 Subsection 118-200(1)

Reasons for decision

Question 1

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.

For a dwelling acquired by the deceased prior to 19 September 1985, you will be entitled to a full exemption if your ownership interest ends within two years of the deceased's death or the dwelling was, from the deceased's death until your ownership interest ends, the main residence of the spouse, an individual who has the right to occupy under the deceased's will, or a beneficiary (if the property was disposed of by that beneficiary). Your ownership interest ends at the time of settlement of the contract of sale.

In your case, the deceased acquired the property prior to 19 September 1985. 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 this case, we consider favourable factors to be the dispute between the siblings, the logistics involved in obtaining letters of administration for the estate, and the legal efforts required to arrange for the removal of Beneficiary A from the property.

We consider the unfavourable factor to be the lengthy period of inactivity between when the deceased passed away in 20XX and when the estate commenced steps to administer the estate in XX 20XX. Whilst we appreciate the beneficiaries were unaware the spouse held no ownership interest in the property, ultimately the

circumstances fail to satisfy paragraph 3 of PCG 2019/5 in that within the two year period of the deceased's death, there were no reasons beyond the estate's control that preventing the property from being disposed. A related issue is that the period of time for which the extension is sought is considered lengthy for PCG 2019/5.

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.

Question 2

Subsection 118-200(1) of ITAA 1997 states that if a deceased estate does not qualify for a full exemption under section 118-195 of ITAA 1997, it may qualify for a partial exemption in certain circumstances. Section 118-195 of the ITAA 1997 does not apply in your circumstances as column 3 of 118-195(1) has not been satisfied.

In determining whether a partial exemption applies, the following formula in subsection 118-200(2) is to be used:

(Capital gain or Capital loss amount × Non-main residence days) ÷ Total days

Section 118-200 provides that where the property was acquired prior to 20 September 1985, the following definitions apply:

•         'Non-main residence days' is the sum of the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of the individual referred to in item 2, column 3 of the table in section 118-195.

•         'Total days' is the number of days in the period from the death until your ownership interest ends

The spouse meets the definition of an individual referred to in item 2, column 3 of the table in section 118-195. The partial exemption will be calculated in accordance with the formula in subsection 118-200(2) of the ITAA 1997. In your case, the non-main residence days used in the formula are considered to be the number of days in the period commencing when the spouse passed away and ending when the estate ceased to own the property.