Edited version of private advice

Authorisation Number: 1052219421977

Date of advice: 15 February 2024

Ruling

Subject: Commissioner's discretion - 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 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.

This ruling applies for the following period:

Year ended DD/MM/20YY

The scheme commenced on:

DD/MM/20YY

Relevant facts and circumstances

The deceased passed away on DD/MM/20YY, leaving a will dated DD/MM/20YY (the Will).

A copy of the Will was provided.

The dwelling is located at XXX (the Property).

The Deceased appointed XXX as executor and trustee (the Executor) and a beneficiary under the Will.

The Deceased acquired the Property sometime after DD MM 19YY.

The Property was the main residence of the deceased just before they passed away and was not used to produce income at that time.

At the time of death, the Executor was living at the Property with the Deceased providing full-time care.

The Executor continued to live at the Property after the Deceased passed as there was a verbal agreement between the Deceased and Executor to be able to do this.

The Executor took over all expenses for the Property.

The Will does not provide a right to occupy or life tenancy interest to any individual.

On DD/MM/20YY, probate was granted to the Executor.

A copy of a letter was provided to support a claim for land tax exemption on the Property.

On DD/MM/20YY, the Executor moved out of the Property having given permission for one of the Deceased's children to move into the Property.

On DD/MM/20YY, the child moved into the Property and resided there for several years.

The Executor then moved back into the Property and stayed there until deciding to move away to be closer to family in late 20YY.

On DD/MM/20YY, a contract of sale was signed on the Property, and settlement occurred on DD/MM/20YY.

The property was situated on less than two hectares of land.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Section 118-195 of the ITAA 1997 disregards capital gains and capital losses made from certain capital gains tax (CGT) events that happen in relation to a dwelling that:

•         was a deceased person's main residence and was not being used to produce assessable income just before they died, or

•         was acquired by the deceased before DD MM 19YY

If you dispose of an ownership interest in a dwelling that passed to you as an individual beneficiary or as the trustee of the deceased's estate within 2 years of the deceased's death, any capital gain or loss you make on the disposal is disregarded. Your ownership interest ends at the time of settlement of the contract of sale. The Commissioner has the discretion to extend the 2-year period.

In your case the Deceased acquired the property in 19XX. After the Deceased passed away, you owned the property as trustee of the estate. The property was the Deceased's main residence just before they passed away and it was not being used to produce assessable income.

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 delay in the sale of the dwelling was 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 17 of 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.

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 the dwelling, or the will, is challenged

•         a life tenancy or other equitable interest given in the will delays the disposal of the dwelling

•         the complexity of the deceased estate delays the completion of administration of the estate

•         settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of your control, or

•         restrictions on real estate activities imposed by a government authority in response to the COVID-19 pandemic

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

•         Renovations or other activities designed to increase the sale price, or

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

The above examples are not exhaustive.

In your case, you ultimately made a choice to retain the property for a longer period to allow two of the beneficiaries (the beneficiaries) to remain living in the property, and we consider that this was the main cause of the delay in selling the property.

As such, we also consider that this was within your control, and is not something which is a factor weighing towards exercising the discretion.

In addition, you have not identified any other factors that prevented you from selling the property whilst the beneficiaries were living in the property. It could be argued that the Executor had an option to move back to their other dwelling.

You also contend that the beneficiaries who resided in the Property after the Deceased's death, although without the legal standing, would identify as a life tenants.

ATO Interpretive Decision (ATO ID) 2003/109 Capital Gains Tax: Deceased estate - main residence exemption states that:

An individual would be considered to occupy a dwelling under the deceased's will if it was in accordance with the terms of the will. This would also be the case if it was in pursuance of the will or under the authority of the will (see Evans v. Friemann (1981) 53 FLR 229 at 238).

In this case, the beneficiaries had no right under the will to reside in the house. The beneficiaries resided in the house because the executor so agreed.

This outcome is consistent with the general rule of construction that the intent of the deceased must be ascertained from the words of the will and that one cannot speculate or guess after that intention. (see Certoma, GL 1987, The Law of Succession in New South Wales, The Law Book Company, Sydney, p. 117.)

As the beneficiaries did not have a right to occupy the dwelling under the will, the trustee cannot disregard the capital gain made on the disposal of the dwelling.

Comparisons can be made between your circumstances, and the circumstances set out in ATO ID 2003/109, as in your case, the beneficiaries also did not have a right to occupy the dwelling under the Will.

We considered the Deceased's wishes. However, the Deceased did not make provisions for the Executor to have a right to occupy the Property in the Deceased's Will dated DD/MM20YY. The intent of the deceased must be ascertained from the words of the Will, and we cannot speculate or guess that intention.

Our view does not change on the outcome of any land tax decision. That is, the beneficiaries did not have a right to occupy under the Will.

As such, you will not be entitled to the exemption under item 2(b) in the table in subsection 118-195(1) of the ITAA 1997.

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 CGT rules will apply to the disposal of the property.