Edited version of private advice

Authorisation Number: 1052219507370

Date of advice: 7 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. The Commissioner will not exercise his discretion under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to the two-year period relating to the disposal of the property. The trustee/beneficiaries of the deceased estate are not exempt from tax on any capital gain made on the disposal of the property pursuant to section 118-195 of the ITAA 1997.

Further information about the Commissioner's discretion can be found by searching ato.gov.au for 'QC 66057'.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away on DD MM 19YY.

The deceased acquired a dwelling at XXXX on DD MM 19YY. This was their main residence at the time they passed away.

The deceased's Will provided their spouse a life interest in the property.

In MM 19YY, their spouse requested that this dwelling be sold, and a more suitable smaller dwelling be purchased, as the dwelling was too large. The dwelling was sold on DD MM 19YY.

The dwelling located at XXXX was purchased shortly thereafter. The Commissioner's discretion for the exemption is requested for this dwelling.

The subsequent dwelling was used as the main residence of the spouse of the deceased from the time it was acquired until the time it was sold. The dwelling was not used to produce assessable income.

The dwelling is situated on less than two hectares of land.

The dwelling was listed for sale on DD MM 20YY, sold on DD MM 20YY, and settled on DD MM 20YY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Section 118-195 of the ITAA 1997 provides that if you own a dwelling in your capacity as the trustee or beneficiary of a deceased estate you can disregard a capital gain or capital loss made from the disposal of a dwelling if:

•         the dwelling was acquired by the deceased before 20 September 1985, or

•         the dwelling was acquired by the deceased 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

•         your ownership interest ends within 2 years of the deceased's death.

The Commissioner has discretion to extend the two-year time period where the trustee or beneficiary of a deceased estate's ownership interest ends after two years from the deceased's death. Practical Compliance Guideline PCG 2019/5: Capital gains tax and deceased estates - the Commissioner's discretion to extend the two-year period to dispose of dwelling acquired from a deceased estate outlines the factors that the Commissioner will consider when determining whether to exercise his discretion to extend the two-year period under section 118-195 of the ITAA 1997. This discretion may be exercised in situations such as where:

•         the ownership of a dwelling or the will is challenged

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

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

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

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

These examples are not exhaustive. They provide guidance on what factors the Commissioner would consider reasonable to exercise his discretion to extend the two-year period.

PCG 2019/5 also outlines factors that would weigh against the Commissioner allowing a longer period. Some factors include inconvenience on the part of the trustee or beneficiary to organise the sale of the dwelling or unexplained periods of inactivity by the executor in attending to the administration of the estate.

Whether the Commissioner will exercise his discretion under subsection 118-195(1) of the ITAA 1997 will depend on the facts of each case.

Application to your circumstances

In your case, the replacement dwelling is ineligible for the exemption as the dwelling was never owned by the deceased prior to their death. The dwelling was acquired by the deceased estate, and as such has no eligibility for the main residence exemption available to individuals.

The Will of the deceased contained no clauses that would allow the sale of the dwelling and a replacement be purchased in any circumstance.

As the Commissioner cannot exercise the discretion to extend the two-year period to dispose of the deceased's inherited dwelling, the normal capital gains tax (CGT) rules will apply to the disposal of the dwelling. You should note that the first element of your cost base for the dwelling is its market value at the time the dwelling was acquired. However, as the dwelling was acquired before 21 September 1999, the cost base of the asset can be indexed for inflation to reduce capital gains. Alternatively, you are entitled to the 50% CGT discount in relation to the property (please note that you can use whichever of these methods gives you the best result - the lowest capital gain - but not both).