Edited version of private advice

Authorisation Number: 1052252509383

Date of advice: 27 May 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 any capital gain or loss you make on disposal?

Answer

No.

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 in 20XX.

The deceased was survived by their adult children, including W and yourself.

The deceased left a Will appointing you as the sole executor of their estate.

The deceased acquired the dwelling after 19 September 1985.

The dwelling was situated on less than 2 hectares of land.

The deceased lived in the dwelling until their passing.

The dwelling was not used to produce assessable income.

The deceased's ashes were spread in the backyard of the dwelling, in accordance with their wishes, approximately a year after their passing.

You initially approached a local real estate agent shortly after the deceased's passing to organise the sale of the dwelling.

The Will of the deceased entitled you to an equal share in the dwelling with your siblings.

You applied to transfer the dwelling's title to you as executor of the estate approximately four years after the deceased's passing.

You received a message from W approximately four years after the deceased's passing requesting that you and their other siblings buy them out of their share of the dwelling.

You replied to W stating that you were undertaking a repair recommended by the real estate agent shortly and you hoped to have the dwelling on the market and sold by the end of the year.

W then sent you a message asking why the dwelling had yet to be put on the market given it had been over four years since the passing of the deceased.

By approximately four and a half years after the deceased's passing, all the defects that the real estate agent had recommended be remedied were rectified.

After this, the property suffered significant damage due to a significant weather event.

The damage caused by the weather event was rectified.

A real estate agent was appointed as sales agent approximately six years after the deceased's passing and the dwelling was placed on the market.

Some sale contracts fell through.

You entered the final contract to sell the property approximately a month after the property was placed on the market and settlement occurred shortly afterwards.

The property was vacant from the deceased's death until settlement.

Sales data shows the number of houses sold in the suburb in which the property is located increased during the COVID-19 period compared to the previous year.

Your contentions

You contend that the delay in the sale of the dwelling was the result of the following:

•         There was difficulty with being able to fulfill the deceased's wishes of having their ashes spread in the backyard of the dwelling due to various factors that were out of your control.

•         Your siblings expected you to perform the repairs that had been recommended on your initial consultation with a real estate agent, but health issues impacted your ability to undertake the repairs.

•         W initially wanted to buy out the other beneficiaries.

•         The COVID-19 pandemic significantly disrupted the real estate market.

•         Repairs were required to fix damage resulting from the weather event.

•         There were sale contracts that fell through.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

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 after 19 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 if 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.

If your ownership interest ends outside of the two-year period, a full exemption may still be available if the dwelling was from the date the deceased's death until your ownership period ends, the main residence of one or more of the following individuals:

•         the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased)

•         an individual who had a right to occupy the dwelling under the deceased's will, or

•         an individual beneficiary to whom the ownership interest passed, and the CGT event was brought about by that person.

In your case, the deceased acquired the property after 19 September 1985. The property was the deceased's main residence until they passed away. The property was not used to produce assessable income just before their death. After the deceased passed away, you owned the property as trustee of the estate.

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 under section 118-195 of the ITAA 1997.

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 outlines the factors that the Commissioner will consider when determining whether or not to exercise the discretion to extend the two-year period under section 118-195 of the ITAA 1997.

Paragraph 3 of PCG 2019/5 provides that the Commissioner will allow a longer period where the sale of the dwelling could not be settled within two years of the deceased's death due to reasons beyond your control.

Paragraph 14 of PCG 2019/5 explains that we weigh up all the factors both in favour and against the granting of the Commissioner's discretion.

In your case, you referred to several factors contributing to the delay:

•         There was an initial period of delay in being able to fulfill the deceased's wishes of having her ashes spread in the backyard of the dwelling due to various factors. We accept that the factors that contributed to this initial period of delay were outside of your control. However, this impediment to the sale of the dwelling was resolved by approximately a year after their passing. Yet the dwelling was not sold for almost another five years.

•         You stated that W initially wanted to buy the dwelling which meant you could not sell it. However, by approximately four years after the deceased's passing they no longer wanted to buy the dwelling. Rather, they wanted the property sold in order to receive their share as per the deceased's Will. However, a real estate agent was not appointed to sell the dwelling for approximately another two years.

•         There were sale contracts that fell through. However, this happened almost six years after the deceased's passing and only resulted in a very short delay.

•         Your siblings expected you to perform the repairs that had been recommended on your initial consultation with a real estate agent shortly after the deceased's passing. However, health issues impacted your ability to undertake the repairs. If was not until approximately four and a half years after the deceased's passing that all the defects that the real estate agent had recommended be remedied were rectified.

It is understandable that a trustee would choose to follow a recommendation from a real estate agent to undertake work to a property before it is sold. This would maximise the sale price that could be achieved. However, a property can be sold 'as is'. The sale price that could be achieved would be lower compared to if repairs were undertaken, as the market value of the property would reflect the current condition of the property. However, this does not mean that the property could not be sold. Although it was an understandable choice that you made to undertake the work recommended by the real estate agent, nevertheless it was still a choice rather than a matter that was out of your control. PCG 2019/5 states that delays due to trying to achieve a higher sale price, such as refurbishing the property, would weigh against the exercise of the discretion.

•         The dwelling was impacted by a severe weather event with repairs required to fix the resulting damage. In contrast to repairs to fix damage that existed at the time of the deceased's passing, a period of delay to undertake repairs to fix damage that arose after the deceased's passing would usually be considered outside of your control. However, the weather event took place almost five years after the deceased's passing. If there had not been a delay in placing the dwelling on the market in order to undertake the work that had been recommended by the real estate agent, then it likely would have been sold before the weather event occurred. In any case, the period of delay caused by the damage from the weather event was a minor portion of the total overall length of delay.

•         You referred to COVID-19 restrictions severely limiting the real estate market as a significant factor contributing to the delay. Our guidelines in PCG 2019/5 state that COVID-19 restrictions are potentially a circumstance favourable to the exercise of the discretion. However, it is a question of fact to be determined on a case-by-case basis whether COVID-19 restrictions actually caused the delay as in some areas of Australia, COVID-19 restrictions did not negatively impact house sales.

In your case, real estate data shows that during the 12 months after COVID-19 commenced, house sales in the suburb that the dwelling is located increased significantly compared to the previous 12 months. Sales in the next 12 months were higher again. This is objective evidence that COVID-19 restrictions did not significantly negatively impact on your ability to sell the property.

In your case, there were factors for and against the extension of time but after considering all the circumstances we have decided not to exercise the discretion. The total length of delay was substantial and there were significant portions of the delay that were not out of your control.

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. In your case, you are entitled to add the cost of repairs to the cost base which will reduce the capital gain, unless insurance proceeds were received for the repair costs. You are also entitled to the 50% CGT discount in relation to the property.