Edited version of private advice

Authorisation Number: 1052236794431

Date of advice: 3 April 2024

Ruling

Subject: CGT - 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 to dispose of the ownership interest in the property and disregard the capital gain made on the disposal?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The Deceased acquired the property as the sole proprietor under the Will of their pre-deceased spouse which was registered on the title several decades ago.

The Deceased lived at the property together with their only child (The Child).

The Deceased passed away, leaving a Will dated a few decades earlier. Pursuant to paragraph 2 of the Will, the deceased appointed their child as executor.

Pursuant to paragraph 3 of the Will, the Child was the sole beneficiary of the Deceased's estate.

The property was the only asset in the Deceased's estate. The Deceased did not have an ownership interest in any other property.

The Child, continued to live and treat this property as their main residence until they passed away. They also did not have an ownership interest in any other property.

During the Child's lifetime and occupation of the property, had paid for rates, insurance, and maintenance of the property.

The Child passed away at the property a couple of years ago.

The Child passed away without a valid Will. Letters of Administration of the Child's estate were granted to a Legal Personal Representative ("LPR") in the following year.

During initial investigations into the Child's estate, a title search was completed on the property.

The results of the title search showed that the property was still registered under the deceased parent's name.

On the basis that the Child survived the Deceased but later died without proving their Will or administering their estate, the LPR applied for the Probate of Deceased's Will.

Letters of Administration with the Will annexed of the deceased were granted to the LPR.

The property has never been used for income producing purposes.

The LPR, as the legal personal representative of the Deceased's estate, sold the property later in the year.

Settlement took place a couple of months after the sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

The main residence exemption in section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to disregard a capital gain or capital loss a taxpayer makes from a capital gains tax (CGT) event that happens to a dwelling that is their main residence.

If a taxpayer inherits an ownership interest, subsection 118-195(1) of the ITAA 1997 applies so that any capital gain or capital loss they make from a CGT event that happens in relation to a dwelling or their ownership interest in a dwelling is disregarded if:

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

•        The deceased acquired the ownership interest prior to 20 September 1985; and

•        Their ownership interest ends within two years of the deceased's death, or within a longer period allowed by the Commissioner.

The Commissioner considers the use of the dwelling for the whole of the period from the date of the deceased's death until settlement of the sale of the dwelling when determining whether or not to exercise this discretion.

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 a dwelling or a will is challenged.

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

•         A trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury).

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

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.

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

The above examples are not exhaustive.

Once any circumstances preventing the sale of the Property have been resolved, the Property needs to be placed on the market as soon as possible to enable its disposal.

In this case the Commissioner will not exercise the discretion under Section 118-195 of the ITAA 1997 as the original executor (the Child) did not take any action to obtain probate of the deceased's estate and to deal with the property as directed by the deceased's will by transferring it to the sole beneficiary or by progressing toward selling the property.

The LPR applied for probate and sold the property after the Child had passed away and the LPR was dealing with their estate.

There was a period of years from when the Deceased passed away and their Child then passed away after living in the property until their death.

The period of inactivity is significant.

It is for the above reasons the Commissioner will not exercise the discretion.