Edited version of private advice

Authorisation Number: 1052252864805

Date of advice: 17 May 2024

Ruling

Subject: Commissioner's discretion - deceased estate

Question 1

Will the Commissioner exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 ('ITAA 1997') to allow an extension to the 2-year limit to DD MM YYYY for the Capital Gains Tax ('CGT') exemption on the sale of the inherited dwelling that was the main residence of the Deceased?

Answer

Yes.

This ruling applies for the following periods

DD MM YYYY to DD MM YYYY

The Scheme commences on

DD MM YYYY

RELEVANT FACTS AND CIRCUMSTANCES

Background information

1.      The applicant for this private ruling is the Trustee for the Estate of AAA, ('the Trustee').

2.      The land at XYZ was purchased on DD MM YYYY by AAA and BBB. A house was built on the land in YYYY and it was their main residence ('the Property').

3.      There is no record of the land price or the building costs available.

4.      BBB passed away on DD MM YYYY and his share passed to his spouse, AAA.

5.      AAA passed away on DD MM YYYY ('the Deceased').

6.      Following the death of AAA, the Property passed to the Trustee.

7.      The Property was listed for sale on DD MM YYYY, as soon as practically possible once the Trustees, CCC and DDD, were in a position to do so. The Property was actively marketed for sale.

8.      The Property sold on DD MM YYYY for $xyz.

9.      The Property settled on DD MM YYYY. Therefore, the property was disposed in x years and x day.

10.   There were a number of reasons for the delay in the settlement, including:

•           the contract date was DDMM YYYY; however, settlement was delayed due to the Christmas and New Year break

•           DD MM YYYY was a public holiday

•           DD MM YYYY was a Sunday and outside of normal business operating hours

•           the offer was subject to finance, which further delayed the settlement.

11.   The Joint Trustees also experienced extenuating circumstances, which further delayed the process of selling the Property, as follows:

•           CCC, Joint Trustee, experienced a serious family medical emergency in MM YYYY involving her spouse, which required her to provide full-time caring duties for many months. Further time was involved in procuring alternative professional care for her spouse.

•           DDD, Joint Trustee, also experienced a serious medical emergency involving his spouse in MM YYYY. He was required to provide ongoing full-time care, which further delayed the decision making process in selling the Property.

12.   The Property was never used for the purpose of producing assessable income.

13.   The Property was sold to an independent third-party.

Information provided

14.   You have provided a number of documents containing detailed information in relation to the Trustee for the Estate of AAA's private ruling application, including:

•           Private Binding Ruling ('PBR') Application, dated DD MM YYYY

•           Response to further questions provided.

15.   We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Assumption(s)

Not applicable.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 118-130(3)

Income Tax Assessment Act 1997 Section 118-195

Further issues for you to consider

Not applicable.

REASONS FOR DECISION

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

SUMMARY

The Commissioner will exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 to allow an extension to the 2-year limit to DD MM YYYY for the Capital Gains Tax ('CGT') exemption on the sale of the inherited dwelling that was the main residence of the Deceased.

DETAILED REASONING

16.   Subsection 118-195(1) of the ITAA 1997 outlines the following with regard to a dwelling acquired from a deceased estate:

(1)    A capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if:

(a)    you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

(b)    at least one of the items in column 2 and at least one of the items in column 3 of the table below are satisfied; and

(c)    the deceased was not an excluded foreign resident just before the deceased's death.

Table 1: Beneficiary or trustee of deceased estate acquiring interest

17.   Subsection 118-130(1) of the ITAA 1997 defines ownership interest in a dwelling as having a legal interest of the dwelling until it ends on settlement of the property.

18.   Subsection 118-130(3) of the ITAA 1997 provides that where the sale or other disposal of the dwelling proceeds under a contract, the ownership interest ends at the time of settlement of the contract of sale and not at the time of entering the contract, as follows:

(3) For land or a dwelling where you have a contract for the happening of the *CGT event, you have an ownership interest in it until your legal ownership of it ends.

19.   Paragraph 1 of Practical Compliance Guideline PCG 2019/5 The Commissioner's discretion to extend the 2-year period to dispose of dwellings acquired from a deceased estate, states that section 118-195 of the ITAA 1997 disregards capital gains and capital losses made from certain CGT events that happen in relation to a dwelling that was a deceased person's main residence and not being used to produce assessable income just before they died, or was acquired by the deceased before 20 September 1985.

20.   Paragraph 2 of PCG 2019/5 states that if you disposeof 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. The Commissioner has the discretion to extend the 2-year period.

21.   Paragraph 3 of PCG 2019/5 states that, generally, we will allow a longer period where the dwelling could not be sold and settled within 2 years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first 2 years.

22.   Paragraph 12 of PCG 2019/5 outlines the circumstances that take more than 12 months to resolve, which will be considered by the Commissioner:

•           the ownership of the 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 the deceased estate delays the completion of administration of the estate, or

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

23.   Paragraph 15 states that factors that would weigh in favour of the Commissioner allowing a longer period include those listed in paragraph 12 of PCG 2019/5 above. The absence of some or all of those favourable factors does not necessarily preclude us from allowing a longer period.

APPLICATION TO YOUR CIRCUMSTANCES

24.   Considering the provisions of subsection 118-195(1) of the ITAA 1997, a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if:

a)     you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate

b)     at least one of the items in column 2 and at least one of the items in column 3 of the table (see previous section) are satisfied, and

c)      the deceased was not an excluded foreign resident just before the deceased's death.

25.   In this matter, the Deceased, AAA, acquired the initial interest the Property DD MM YY and the remaining interest on DD MM YYYY, following the death of their spouse. As per Item 2 in Column 2 in subsection 118-195(1) of the ITAA 1997, the Deceased acquired the initial interest in the property before 20 September 1985. As per Item 1 in Column 2 in subsection 118-195(1), the Deceased acquired the remaining ownership interest on or after 20 September 1985. Further, the dwelling was the Deceased's main residence just before their death and was not being used for the purpose of producing assessable income.

26.   The Deceased passed away on DD MM YYYY, and the Property passed to the Trustees of the estate.

27.   Following extenuating medical circumstances of the Trustee's spouses, the Property was listed for sale on DD MM YYYY, as soon as practically possible once the Trustees were in a position to do so. The Property was actively marketed for sale.

28.   The Property sold on DD MM YYYY for $xyz, and settled on DD MM YYYY, following the Christmas/New year break and a number of public holidays.

29.   As per Item 1 in Column 3 as set out in subsection 118-195(1) of the ITAA 1997, the Trustee's ownership interest ends within 2 years of the Deceased's death, or within a longer period allowed by the Commissioner.

30.   Having considered all the relevant facts, the extenuating medical circumstances of the relevant parties and how soon after the 2-year limit the dwelling was sold, the Commissioner will apply the discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the 2-year time limit until DD MM YYYY, following the date of settlement of the property and the date when the Trustee's ownership interest ends.

CONCLUSION

The Commissioner will exercise the discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 to allow an extension to the 2-year limit to DD MM YYYY for the Capital Gains Tax ('CGT') exemption on the sale of the inherited dwelling that was the main residence of the deceased.