Edited version of private advice

Authorisation Number: 1052204213290

Date of advice: 15 December 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise his discretion under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the two (2) year time limit following the death of the deceased until the disposal of the Property on or before XX XX 20XX?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2024

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On or around 19XX, the Deceased (Brother A) and the brother of the Deceased (Brother B) purchased a property (the Property), as tenants in common.

The Property was XX acres in size.

On or around 19XX, Brother A and Brother B subdivided the Property.

The Property size reduced to approximately XX acres.

The Property was not used to produce assessable income.

Brother A and his spouse (Spouse A) resided in the Property.

Brother B and his spouse (Spouse B) resided in the Property.

Brother B and Spouse B had two children.

The child (Beneficiary A),and the other child (Beneficiary B) are the beneficiaries of the Property through testamentary trusts.

On XX XX 20XX, Spouse A passed away.

On XX XX 20XX, Brother B passed away and left a will.

Brother B's will gave their 50% share of the Property, in trust, equally to Beneficiary A (Trust 1) and Beneficiary B (Trust 2).

Clause 3(b)(iii) of Brother B's will states:

•         I am confident that [Beneficiary B] and [Beneficiary A] will look after and accommodate my wife [Spouse B] in the way that they always have and ensure she lacks for nothing.

On XX XX 20XX, Brother A (the Deceased) passed away and left a will (the Will).

The Will of the Deceased gave 50% share of the Property, in trust, equally to Beneficiary A (Trust 3) and Beneficiary B (Trust 4).

Clause 3(b)(iii) of the Deceased's Will states:

•         I have made the above request as a result of my wife, [Spouse A], being incapacitated. I am confident that [Beneficiary B] and [Beneficiary A] will look after [Spouse A] in the way that they always have and ensure that she lacks for nothing.

Spouse B still resides in the Property.

Spouse B is not a beneficiary nor a trustee of the Deceased's estate and so is not acquiring an interest in it, although she is a beneficiary of the 4 trusts.

From 20XX, the beneficiaries have attempted to encourage Spouse B to move out of the Property.

Spouse B wanted to continue living the Property after the Deceased passed away as:

•         The Property has always been Spouse B's home

•         Spouse B is XX years of age and feels comfortable and safe living in the Property

•         Spouse B likes the area in which the Property is located. They have friends nearby.

•         Spouse B wanted stability following the passing of Spouse A, Brother B and the Deceased.

On or around XX 20XX, Spouse B advised Beneficiary A and Beneficiary B that she was ready to move out of the Property on condition that she live in a granny flat on Beneficiary B's property.

Construction of the granny flat then commenced and has recently been completed.

Beneficiary A and Beneficiary B agreed to allow Spouse B to continue to reside in the Property until its sale and settlement.

Beneficiary A and Beneficiary B commenced negotiations with developers for sale of the Property.

A contract of sale was signed on XX XX 20XX.

The Property is expected to settle on or before XX XX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997Section 118-195

Income Tax Assessment Act 1997 Section 118-210

Reasons for decision

Summary

The 'right to occupy' the dwelling under the deceased's will' for the purpose of item 2(b) in column 3 of the table in subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) limits its application to specific named persons in the deceased's will. It does not extend to a trustee exercising a discretion to create a right to occupy the dwelling in favour of a beneficiary under a testamentary trust.

Detailed reasoning

The Deceased had a 50% ownership interest in the Property, as tenants in common, with their brother. The Deceased's 50% share of the Property was acquired by the trustees on the date of the Deceased's death.

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. The dwelling is a CGT asset. Its sale is a CGT event under section 104-10 of the ITAA 1997.

Section 118-195 of the ITAA 1997 explains eligibility criteria that must be met to determine if a capital gain or capital loss can be disregarded when a CGT event happens to a dwelling that you owned as the trustee of a deceased estate.

Where the deceased acquired their ownership interest in the property before 20 September 1985, item 2(b) of subsection 118-195(1) of the ITAA 1997 requires that either your ownership interest ends within 2 years of the deceased's death, or that the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of:

(a)   the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased); or

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

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

Spouse B was not the spouse of the Deceased, and the Will of the Deceased did not provide Spouse B the right to occupy the dwelling for the purpose of item 2(b) of column 3 of the table in subsection 118-195(1) of the ITAA 1997.

Where a trustee's ownership interest in the deceased's dwelling ends more than two years after the date of the deceased's death, a full main residence exemption will only be available if the dwelling was the main residence of a specified individual during the trustee's ownership period. An exemption is not available for any part of the trustee's ownership period that a person continues to occupy the dwelling in some other manner that has not been provided for in the Will of the deceased.

The CGT implications for Trustees that acquire a dwelling under a Will in a deceased estate are considered in subsection 118-210(1) of the ITAA 1997. This subsection provides that if a trustee receives money or property from a CGT event happening to a dwelling, the trustee does not make a capital gain or capital loss if the dwelling was the main residence of a qualifying individual from the time the trustee acquired an ownership interest in it until the time of the event.

The prerequisite for section 118-210 of the ITAA 1997 applying is stated under subsection 118-210(1) of the ITAA 1997: "This section applies if you are the trustee of a deceased estate and, under the deceased's will, you acquire an ownership interest in a dwelling for occupation by an individual [emphasis added]".

The issue of when a trustee of a deceased estate acquires an ownership interest under the will of a deceased person is considered in Taxation Determination TD 1999/74: Income tax: capital gains: in what circumstances does a trustee of a deceased estate acquire an ownership interest in a dwelling 'under the deceased's will' for the purposes of subsection 118-210(1) of the Income Tax Assessment Act 1997. In order for a dwelling to be acquired under a will, there needs to be a connection between the trustee's acquisition of an ownership interest in a dwelling and the deceased's will.

TD 1999/74 states that a trustee acquires an ownership interest in a dwelling under the will of a deceased person for the purposes of subsection 118-210(1) if the interest is acquired in accordance with the terms of the will, or in accordance with the terms of the will as modified by any court order. The trustee also acquires an interest under the deceased's will if they acquire it in pursuance of the will or under the authority of the will.

ATO Interpretive Decision (ATO ID) 2003/109 - Capital Gains tax: Deceased estate - main residence exemption is applicable to your situation. In this case, the ownership interest in a dwelling passed to the taxpayer and the executor and beneficiaries of the estate agreed that until the dwelling was sold, the property could be occupied by one of the beneficiaries. ATO ID 2003/109 explains that an individual would only be considered to occupy a dwelling under the deceased's will if it was in accordance with the terms of the will. Where a beneficiary has no right to reside in a property of a deceased estate, the trustee cannot disregard the CGT on disposal of the dwelling.

The Deceased has not made provisions for Spouse B to have the right to occupy the Property in their Will. The intent of the deceased must be ascertained from the words of the Will, and we cannot speculate or guess after that intention.

Exercise of the discretion

Paragraph 11 of Practical Compliance Guide PCG 2019/5 - Capital gains tax and deceased estates - the Commissioner's discretion to extend the two-year period to dispose of dwellings acquired from a deceased estate, explains the circumstances the Commissioner will consider when determining if you qualify for discretion to disregard any capital gain or capital loss on the disposal of a dwelling outside the two-year period.

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

How much weight we give to each factor will depend upon the circumstances of each case. The circumstances that caused the delay in disposing of the ownership interest are more important than the length of the delay. The amount of any potential capital gain or loss is not relevant to whether the discretion is exercised.

We will not allow a longer period for even a very short delay beyond two years if there are no relevant circumstances present. Likewise, a lengthy delay will not prevent us from allowing a longer period where relevant circumstances caused the delay and persisted for the overwhelming majority of the total period.

Generally, 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.

In your circumstances, a decision was made to permit Spouse B to continue to reside in the property, the delay was not caused by reasons beyond your control that existed for a significant portion of the first two years.

The Will gives you ownership of the dwelling, but it does not give any beneficiaries the right to reside/occupy. Accordingly, the capital gain made on the disposal of the dwelling is not disregarded.

In PCG 2019/5, example 2 at paragraph 25 is similar to your situation and provides more practical reasoning as to why discretion cannot be applied. In your circumstances, Spouse B was not given any right to occupy the house under the Will of the Deceased. The decision to allow Spouse B to reside in the dwelling was a matter of choice within the control of the trustee. Because the delay in selling the dwelling was not caused by a 'favourable factor' the trustee cannot rely on the safe harbour and the Commissioner cannot exercise his discretion under section 118-195 of the ITAA 1997.

Application to your circumstances

In the case of occupation of the dwelling by a person during a period that is still owned by the trustee of the deceased estate, the exemption rules require that Spouse B has a specific right to occupy the Property under the Will of the Deceased. Furthermore, the right to occupy must be for the full period until disposal of the dwelling by the Trustees.

There are two independent paths to the exemption (if the other conditions are satisfied). The dwelling may be occupied by the spouse of the deceased, OR a person given the right to occupy it under the will.

The Commissioner cannot exercise his discretion under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the two-year time limit to disregard the CGT on the Deceased's 50% share of the ownership interest in the Property, following the death of the Deceased up until the disposal of the Property.

Calculating the cost base

As detailed in subsection 118-210(2)(b) and subsection 118-210(2)(c):

(b)  The first element of the *dwelling's *cost base and *reduced cost base in the hands of the individual is its cost base and reduced cost base in your hands at the time of the event; and

(c)   The individual is taken to have *acquired it when you did.

Taxation Ruling (TR) 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests considers the CGT consequences for each party arising from the creation of life and remainder interests in property. In respect of the life interest and remainder owners, equitable life or remainder interests are acquired when they commence to be owned. Paragraph 25 highlights subsection 110-25(2) of the ITAA 1997, which states that the first element of the cost base is:

(a)  The money you paid, or are required to pay, in respect of *acquiring it; and

(b)  The *market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of acquisition).

The Property was the main residence of the Deceased at their date of death. CGT is taxable on the Deceased's 50% share of the Property, for the period after his death. The first element of the cost base of the property for you as trustee is the market value of the Property on the Deceased's date of death.