Edited version of private advice

Authorisation Number: 1052218052441

Date of advice: 26 February 2024

Ruling

Subject: CGT - deceased estate

Question 1

Will the Commissioner exercise the discretion in subsection 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the 2 year time to dispose of the commercial buildings on the property?

Answer

Yes.

Question 2

Will the Commissioner exercise his discretion under section 118-195 of the ITAA 1997 to extend the two-year main residence exemption period?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

The deceased passed away several years ago.

The property was acquired in early1985.

The property was the main residence of the deceased.

The property consists of pre-CGT buildings and post CGT buildings.

The deceased lived in the pre-CGT buildings while operating a business from the post CGT buildings.

An employee made an unfair dismissal claim during the same period the deceased passed away. The claim was pursued through the courts but was ultimately discontinued.

Prior to the deceased passing away, the business was also subject of an audit which took approximately a number of months, including a number of weeks after the deceased had died.

Probate was granted by the court early in the year following the date of death.

A couple of months after Probate was granted, the State government closed the borders for an extended period of time.

Several months after the lockdowns had started you began discussions for the sale of the property with Company Z.

A Non-Disclosure Agreement ('NDA') to sell both the business and the residential premises was entered into with Company Z. This included an exclusivity clause preventing the sale to another party until negotiations had concluded.

A few months after you had entered into the NDA, you received an offer from Company X, however at this time you were still constrained by the exclusivity clause in the NDA with Company Z.

Several months after the original NDA was signed, an amended NDA with Company Z was agreed upon with first right of refusal from Company Z.

The NDA with Company Z was further amended a month after the first amendment.

The negotiations continued for several more months at which time Company Z decided to withdraw and not proceed with the purchase.

You entered negotiations with a second purchaser, Company Y, who only wanted to purchase the business but not the business premises.

The sale of the business to Company Y settled a few months after negotiations started.

After the sale of the business, you continued with the sale of the business premises with a notice of sale issued due to the first right of refusal that was part of the lease agreement you had with Company Y.

You approached multiple real estate agents in relation to selling the business premises. Company Y requested extension in relation to the first right of refusal as they had not received the notice of sale.

The sale had been delayed as Company Y had not responded to you and had not waived their right of refusal.

The marketing of the property continued for a few months.

The Estate entered into a contract for sale.

The sale of the property was settled a few years after the date of death.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-80

Income Tax Assessment Act 1997 section 152-80(3)

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Question 1

Section 152-80 of ITAA 1997 allows either the legal personal representative of an estate or the beneficiary to apply the small business CGT concessions in respect of the sale of the deceased's asset if certain conditions are satisfied.

These conditions, as set out in subsection 152-80(1) of the ITAA 1997, are:

a.    the CGT asset forms part of the estate of a deceased individual, or was owned by joint tenants and one of them dies

b.    the asset devolves to the individual's legal personal representative, passes to a beneficiary of the individual or an interest in the asset is acquired by the surviving joint tenant or tenants (as the case may be)

c.     the deceased individual would have been entitled to disregard a capital gain if a CGT event had happened in relation to the CGT asset immediately before their death, and

d.    a CGT event happens in relation to the CGT asset within 2 years of the individual's death.

The Commissioner may extend the time limit as per subsection 152-80(3) of the ITAA 1997.

In this case, as the disposal of the property did not occur within 2 years of the deceased's death the Estate will only be able to disregard the capital gain made on the disposal of the interest in the land if the Commissioner extends the 2 year time limit.

In determining whether to exercise the discretion to extend the time limit set out in paragraph 152-80(1)(d) of the ITAA 1997, the Commissioner has considered the following factors:

•         whether there is evidence of an acceptable explanation for the period of extension requested and whether it would be fair and equitable in the circumstances to provide such an extension,

•         whether there is any prejudice to the Commissioner if the additional time is allowed, however the mere absence of prejudice is not enough to justify the granting of an extension,

•         whether there is any unsettling of people, or of established practices,

•         fairness to people in like positions and the wider public interest,

•         whether there is any mischief involved, and

•         the consequences of the decision.

Application to your circumstances

Having considered the facts of your situation, we accept that there were circumstances that arose as a result of the State lockdowns that, in conjunction with the exclusivity clause, prevented you from disposing of the property within the two-year period from the date the deceased passed away.

Therefore, in this case the Commissioner has decided to exercise his power to extend the two-year period available to the Trustee of the deceased estate to dispose of the inherited property for the purposes of subsection 152-80(3) of the ITAA 1997.

Question 2

A capital gain or capital loss may be disregarded under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) where a capital gains tax event happens to a dwelling if it passed to you as an individual and a beneficiary of a deceased estate or you owned it as the trustee of the deceased estate.

For a dwelling acquired by the deceased on or after 20 September 1985, that was the deceased's main residence and not used to produce assessable income just before their death, you will be entitled to a full exemption of your ownership interest ends within two years of the deceased's death. Your ownership interest ends at the time of settlement of the contract of sale.

In this case, the deceased acquired the Property in early 1985. The Property was the deceased's main residence prior to death, and at that time, was not being used to produce assessable income.

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 (PCG 2019/5) 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 219/5 explains we weigh up all of the factors (both favourable and adverse). Paragraph 17 of PCG 20195 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.

Application to your situation

In this case, we consider as favourable factors:

•         the Property was not used for income producing purposes

•         the lockdowns imposed by the State government contributed to the delay in disposing of the property as it prevented purchasers from inspecting the property

•         you were unable to accept any additional offers due to an exclusivity clause that formed part of the Non-Disclosure Agreement you entered into with Company Z

•         when the first sale, that included all assets, fell through you sold the business to the second purchaser while retaining the business premises, land and buildings

•         you continued to market the property for sale and accepted the next offer on the remaining assets

Having considered the facts of your situation, we accept that there were circumstances that arose as a result of the State lockdowns that, in conjunction with the exclusivity clause, prevented you from disposing of the property within the two year period from the date the deceased passed away.

Therefore, in this case the Commissioner has decided to exercise his power to extend the two year period available to the Trustee of the deceased estate to dispose of the inherited property for the purposes of section 118-195 of the ITAA 1997.

As the Commissioner has decided to extend the two year period then in accordance with section 118-120 of the ITAA 1997, the discretion may extend to the adjacent land and structures to the dwelling to the extent they were used primarily for private or domestic purposes in association with the dwelling.