Edited version of private advice

Authorisation Number: 1052200531126

Date of advice: 5 December 2023

Ruling

Subject: CGT - 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 to dispose of the ownership interest in the property and disregard the capital gain made on the disposal?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away on DD MM 20XX.

The property was the deceased's principal place of residence just before they passed away.

The property was purchased by the deceased after 1985.

The property was a commercial property and a number of years ago the downstairs office area was converted into a bedroom. A shower along with a kitchen was also installed.

The property was never used to produce income.

The property was less than 2 hectares in size.

The property remained vacant until it was sold.

At the time of the deceased passing, the deceased had been residing at a facility, due to their inability to walk and due to their health starting to rapidly deteriorate.

During the first few months following the deceased's death, the state was in various stages of lockdown. There were a number of lockdowns in total with travel restrictions in place until the final lockdown ended when the state had reached its vaccination goal.

The deceased had a number of children.

The executors of the estate are the children as per the Will.

Whilst administering the estate, one of the executors was going through a highly emotional, complex, and hurtful breakup with their spouse.

The stress that this caused the executor resulted in them suffering a mental breakdown. They sought help from their family doctor and psychologist. They were diagnosed with depression and trauma for which they were advised to go on mild medication and slowly over the course of a year following the deceased passing, they became strong enough to start working through the estate.

An initial conversation with a probate lawyer took place where you were informed that the probate process should be straight forward. Given the mental health of the executor and knowing that there was an enormous workload to clear the property it was decided to hold off so that all of the beneficiaries could work through it all together.

The draft 'Inventory of Assets and Liabilities' along with an affidavit was provided for the executors to sign and it was lodged with the Supreme Court.

The Supreme Court came back advising that due to the deceased having dementia you needed to provide an affidavit from the doctor who was treating the deceased in a prior year when the deceased signed the Will, attesting that the deceased had the capacity to make a Will at that time.

The deceased's treating doctor was not comfortable providing this affidavit even though they had provided similar documentation to obtain Power of Attorney a year after the Will was signed. Nevertheless, the executors now needed to reach out to the lawyer who prepared the Will along with the witnesses of the Will. Again, there were delays here as the lawyer was difficult to locate and the witness who was also the reader couldn't remember who had read the Will, even though they had signed the Will stating that they were in fact the reader.

After some back and forth with the Supreme Court probate was eventually granted.

An executor was between jobs and decided to start to clear the belongings with the assistance of the other beneficiaries.

The property was full of antique furniture, heavy machinery, books and personal belongings. There was literally furniture and stuff piled up on furniture and stuff that you needed to sort through, sell, gift or throw away.

Real estate agents, who all confirmed that everything needed to be moved out and some maintenance needed to be completed to the property, such as painting, new roof tiles, lighting and the installation of new carpets. All of these repairs were completed.

The property was officially placed on the market with an auction and then the property was eventually sold

The property settled a few months later.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

The main residence exemption in section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to disregard a capital gain or capital loss a taxpayer makes from a capital gains tax (CGT) event that happens to a dwelling that is their main residence.

If a taxpayer inherits an ownership interest, subsection 118-195(1) of the ITAA 1997 applies so that any capital gain or capital loss they make from a CGT event that happens in relation to a dwelling or their ownership interest in a dwelling is disregarded if:

•         They are an individual and the interest passed to them as a beneficiary in a deceased estate, or they owned it as the trustee of a deceased estate; and

•         The deceased acquired the ownership interest 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

•         Their ownership interest ends within two years of the deceased's death, or within a longer period allowed by the Commissioner.

Where the deceased acquired the property prior to 20 September 1985, the dwelling was from the deceased death until your ownership interest ends the main residence of one of the following:

•         the spouse of the deceased immediately before their death (but not a spouse who was permanently separated from the deceased)

•         a person who has a right to occupy the property under the deceased's will

•         you, as a beneficiary, if you dispose of the property as a beneficiary.

Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example:

•         The ownership of a dwelling or a will is challenged.

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

•         A trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury).

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

Factors that would weigh against the granting of the discretion include:

•         Waiting for the property market to pick up before selling the dwelling.

•         Property used to earn assessable income.

•         Unexplained periods of inactivity by the executor in attending to the administration of the estate.

The above examples are not exhaustive.

In addition, once any circumstances preventing the sale of the Property have been resolved, the Property needs to be placed on the market as soon as possible to enable its disposal.

In addition to the above and in order for the Commissioner to exercise any discretion, the Commissioner must be satisfied that the property fits the definition of a "dwelling". A commercial property does not fit the definition of a "dwelling" as per section 118-120 of the ITAA 1997 (below):

'Dwelling' consists wholly or mainly of residential accommodation (subsection 118-115(1) of the ITAA 1997), such as:

•         a house or cottage

•         an apartment or flat

•         a strata title unit

•         a unit in a retirement village

•         a caravan, houseboat or other mobile home.

The meaning of the term 'dwelling was considered in Taxation Determination TD 1999/69: The word 'dwelling' is defined in The Macquarie Dictionary as 'a place of residence or abode; a house'.

In Campbell v O'Sullivan [1947] SASR 195 at 201, May J stated that:

'... "dwelling" ordinarily signifies a place of abode or residence, a tenement, habitation, or house, which premises a person or persons are using as a place for sleeping and usually for the provision of some meals.'

Whilst we don't dispute that the deceased lived in the property prior to their passing as their place of abode/residence, ,the Commissioner is not satisfied that the property consists of "wholly or mainly of residential accommodation" at the time that it was sold. This is evidenced from the photos and video you provided to us.

As the Commissioner considers the property does not support the definition of a dwelling to be able to access the main residence exemption under section 118-195 of the ITAA 1997, CGT will be payable following the sale of the property.

As the property was held for more than 12 months before it was sold you can use the discount method to calculate your capital gain. That is, you apply the discount percentage of 50% to reduce your capital gain.