Edited version of private advice

Authorisation Number: 1052216565449

Date of advice: 30 January 2024

Ruling

Subject: Deceased estate - excluded foreign resident

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 on an overseas property?

Answer

No.

This ruling applies for the following period

30 June 20XX

The scheme commenced on:

XX July 20XX

Relevant facts and circumstances

The deceased (Client 1) purchased a dwelling located at Town A, Country A in the 19XX's, initially as holiday home, however they moved to Country A permanently in 20XX, making this property their main residence from this time onwards.

The property size was less than X hectares.

The deceased passed away in June 20XX during the COVD 19 pandemic in Country A.

Client 2 and Client 3 are both beneficiaries of the estate. Client 3 is a resident of Country A.

The property was not lived in by a spouse, beneficiary or anyone who had the right to occupy under their will.

The property was not used to produce assessable income.

Client 2 flew to Country A and arrived on the XX June 20XX, planning to stay two to three weeks going through their personal effects. However due to the international travel caps and restrictions Client 2 had to return home to their family.

Client 2 was not able to spend enough time in Country A following the deceased's death to fully arrange their personal affairs for fears of not being able to get back to their family due to caps put on international arrivals.

Client 2 was in quarantine for two weeks once they returned to Australia.

Due to this Client 2 was not able to complete arranging the personal effects of the deceased in the property in a timely manner.

Client 2 and Client 3 decided to keep the property so Client 2 could have a chance to return and complete working through the personal effects.

Client 2 and Client 3 agreed to keep the property for family use and short-term holiday lets in the interim. During these times Client 1's belongings were moved to a designated locked room, that the people letting the house could not access.

The title to the property was transferred into the names of Client 2 and Client 3 as beneficiaries approximately 12 months after the death of Client 1.

Client 2 returned to the Country A to complete the organising of Client 1's personal effects in December 20XX.

Client 2 believed this was the earliest time that they could practically travel due to the ongoing travel restrictions, work and personal commitments, and the availability of reasonably cost flights.

At this point Client 2 and Client 3 instructed an estate agent to list the property for sale.

Where Client 1's property is located in Town A is a popular holiday destination during the summer, there is a limited interest in the property market outside of these months, this also contributed to a delay in the property sale.

Client 3 did not attempt to clean out the property, Client 3 left it out of respect to Client 2, to complete the clean out in person, to give closure and complete the grieving process.

The property was sold approximately three years after the death of the deceased.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 118-195(1)(c)

Income Tax Assessment Act 1997 section 118-110(4)

Income Tax Assessment Act 1997 section 128-15

Reasons for decision

Subsection 118-195(1) of the ITAA 1997 provides that a capital gain or capital loss made on a dwelling acquired from a deceased estate may be disregarded if:

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

•         both of the following requirements are satisfied:

o    the deceased acquired the ownership interest on or after XX September 19XX 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

o    your ownership interest ends within X years of the deceased's death or within a longer period allowed by the Commissioner and

•         the deceased was not an excluded foreign resident just before the deceased's death.

Subsection 118-110(4) of the ITAA 1997 states that you are an excluded foreign resident at a particular time if you are a foreign resident at that time and the continuous period ending at the time for which you have been a foreign resident is more than X years. A main residence exemption is denied for foreign residents, which flows through to deceased estates as well.

In your case the deceased was a foreign resident for more than X years just before they passed away, therefore, they were an excluded foreign resident just before they died.

Therefore, the condition in subsection 118-195(1) of the ITAA 1997 for the deceased to not be an excluded foreign resident is not met and the Commissioner is unable to consider exercising the discretion to allow a longer period to dispose of the property.

Other relevant comments

Under section 128-15 of the ITAA 1997, where a CGT asset that a foreign resident owned just prior to dying passes to a beneficiary in the estate, the beneficiary is taken to have acquired that asset on the day the deceased died.

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, as you held an ownership interest for at least XX months.