Edited version of private advice

Authorisation Number: 1052256726955

Date of advice: 31 May 2024

Ruling

Subject: Commissioner's discretion - deceased estate and main residence exemption

Question 1

Was the property occupied by somebody who had a right to occupy the property under the deceased's Will for the purposes of column 3, item 2(b) in subsection 118-195 of the ITAA 1997?

Answer

No.

Question 2

Will the Commissioner exercise the discretion to extend the two-year period in subsection 118-195(1) of the ITAA l997?

Answer

No.

Question 3

Does the main residence exemption in section 118-195(1) of the ITAA 1997 apply in relation to the total of the capital proceeds that the executrices received for the property?

Answer

No.

This ruling applies for the following period:

30 June 20xx

The scheme commenced on:

xx/xx/20xx

Relevant facts and circumstances

Background

The deceased passed away on xx/xx/20xx. The deceased was a resident of Australia for tax purposes when she died. She commenced living in Australia in 19xx.

Probate of the deceased's Will was granted by the Supreme Court of XXX on xx/xx20xx and by the High Court in Country A on xx/xx/20xx. The executrices are both residents of Australia for tax purposes.

At the time of her death, the deceased owned a property in Country A (the property) that she had acquired pre-CGT.

The deceased's Will provides that the property was to be sold and the proceeds distributed between 8 beneficiaries. However, the executrices had an absolute discretion to postpone the sale.

The Will further provided that, should the deceased's brother or his wife and or the deceased's nephew and his family continue to occupy the property pending its sale, they were obliged to pay outgoings in respect of the property. The Will did not provide a right to occupy the property for the nephew and his family.

The deceased lived by traditional Country A values whereby family members are expected to contribute to their broader family's success, both financially and emotionally. Consistently with those values, the deceased provided the property rent-free for the use of her nephew and his family when in 19xx they were able to move from Country B to Country A. As per the statutory declaration of the nephew's widow, she and her son occupied the property continuously from 19xx. The nephew lived there with them until he passed away on xx/xx/20xx.

The executrices became the registered owners of the property on xx/xx/20xx. As they were entitled to do and consistent with what they considered the deceased would have wanted them to do, they postponed the sale of the property to enable the existing living arrangements to continue. The nephew's widow and her son continued to live at the property until xx/xx/20xx.

Sale details

On xx/xx/20xx, the estate received an Offer to Purchase the property from the Authority in Country A. The offer was for the total amount of $XXX. It was a condition of sale that the estate deliver up vacant possession on completion.

On xx/xx/20xx, the executrices (through their lawyer) terminated their permission for the occupiers to remain at the property. The occupiers surrendered the keys to the property on xx/xx/20xx.

In order to sell the property to the Authority, the Executrices were required to enter into two separate agreements with the Authority:

•         an Agreement for Sale and Purchase (ASP) under which $XXX was payable to the executrices

•         an Allowance Agreement (AA) under which $XXX was payable to the executrices. The condition for payment of the Allowance amount was that it would only be paid to the estate after it successfully completed the conveyance under the ASP.

The estate has not distributed any of the sale proceeds to the eight beneficiaries

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Subsection 118-195(1) of the ITAA 1997 states that if you own a dwelling in your capacity as trustee of a deceased estate, then you are exempt from tax on any capital gain made on the disposal of the property if:

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

•         the property 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 this period in certain circumstances).

You have an ownership interest in a property if you have a legal interest in the property. This means that if you sell a property, your ownership interest continues until the date of settlement (rather than the date the contract of sale is signed).

In this case, at the time of the deceased's death on xx/xx/20xx, the deceased owned the property in Country A that she had acquired pre-CGT. The property was the main residence of the deceased's nephew and his family since 19xx. The nephew passed away on xx/xx/20xx and his widow and her son continued to live at the property until xx/xx/20xx.

Probate of the deceased's Will was granted by Supreme Court of XXX on xx/xx/20xx and by High Court of Country A on xx/xx/20xx.

The deceased's Will did not provide for the nephew, his widow and their son a right to occupy the property.

The estate has not distributed any of the sale proceeds to the eight beneficiaries.

The Commissioner can exercise his discretion in situations such as where:

•         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), or

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

In this case, the deceased's Will provides that the property was to be sold and the proceeds distributed between eight beneficiaries. The Will does not provide a 'right to occupy', instead, the Will provides a discretion for the Executors to postpone the sale, and in the event the deceased's brother and his family (or the deceased's nephew and his family) inhabit the property until it is sold, it imposes an obligation on them to pay outgoings.

The property sale settled more than 21 years after the deceased's death. Therefore, you require the Commissioner's discretion to extend the 2-year period to be eligible for an exemption.

In this case, there has been no challenge to the Will, the estate was not complex, there were no unforeseen or serious personal circumstances that prevented the sale, and the delay in selling the property is not due to circumstances beyond the trustee's control. While we appreciate your circumstances of living by traditional Country A values, this is not a situation in which the Commissioner can exercise his discretion. Having considered the relevant circumstances, the Commissioner will not exercise his discretion and extend the 2-year time limit.

As the deceased's Will did not provide for the nephew, his widow and their son to occupy the dwelling under the Will, the main residence exemption in section 118-195(1) of the ITAA 1997 does not apply in relation to the total of the capital proceeds that the executrices received for the property. Therefore, the normal CGT rules will apply to the disposal of the property. You should note that the first element of the cost base for the property is its market value on the deceased's date of death. You are entitled to the 50% CGT discount in relation to the property.