Edited version of private advice

Authorisation Number: 1052262174312

Date of advice: 28 June 2024

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise the discretion under section 118-195 of 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.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

At some time prior to 20 September 1985, the deceased bought the property.

On XX XXXXX XXXX, the deceased passed away. The deceased's will appointed Executor A and Executor B as executors and trustees of the estate.

The deceased was the sole owner of the property for their entire ownership period.

The property is located on a land area of less than 2 hectares.

The property was not used by the deceased to produce income.

Between XXXX XXXXX and XX XXXX XXXXX, Executor A attempted to discuss the estate with Executor B multiple times. Executor B did not respond to Executor A.

The following year, Executor A cleaned and sorted out the property.

Executor A made repeated offers to Executor B to live in the property and pay rent to Executor B apportioned to their half share of the property. Executor A also offered to pay the associated rates and water, Executor B did not respond to Executor A.

Between XX XXXXX XXXX and X XXXXX XXXX, Executor A repeatedly raised the subject of the estate with Executor B was reluctant to provide any information. Executor B conveyed that they had consulted a solicitor and that the estate was held up in a government process, because the deceased did not leave an enduring power of attorney.

Executor B and their partner made an offer to Executor A to purchase the property for XXXXXX, whilst advising Executor A the value of the property was XXXXX. Executor A accepted the offer for the sum of XXXXX for their half share of the property, although no documents to confirm the transfer were completed.

During mid XXXX to late XXXX, Executor A attended the deceased's solicitor to request a copy of the will.

Executor A found out then they were an executor of the will.

Later that year Executor A filed an application for grant of probate in the Court. The request for probate was denied on the basis that Executor B did not join the application. Executor A's lawyer served a notice to Executor B to apply for probate. Sometime after, a redrawn application for grant of probate was filed with the Court.

Following this, the Court made requisitions to serve the 'Notice to apply for probate' on Executor B. The following year the lawyer for Executor A employed a process server to serve an updated 'Notice to apply for probate' on Executor B. Executor B notified that they intended to make an application to apply for a grant of probate. A couple of months after, Executor B requested a copy of the application for a grant of probate. Executor A's lawyer provided Executor B a copy of the application for a grant of probate.

On XX XXX XXXX, Executor A's lawyer filed a Notice of motion in the Court seeking leave for probate to be granted to Executor A as Executor B had failed to make an application or join Executor A's application.

Executor A's lawyer sent a letter to Executor B's lawyer advising them that Executor A was taking steps to make a sole application and provided them with copies of documents to be filed in the Court.

Probate was granted to Executor A, and title transferred to Executor A as an executor for the estate.

On XX XXX XXXX, Executor A regained possession of the property from Executor B.

Executor A received correspondence from Executor B's lawyer enquiring about the proposed sale of the property and the division of sale proceeds. Executor A responded to confirm division of sale proceeds and the rental receipts of Executor B. Thereafter, Executor B's lawyer did not respond.

Executor A moved into the property. Executor A received correspondence from Executor B seeking XX% of the sale proceeds. Executor A agreed to repayment of original money received but refused Executor B's XX% split of the proceeds.

From XXXX to XXXXX, Executor A and Executor B exchanged settlement proposals. They agreed to formalise the arrangement and began the process of preparing a Deed of Family Agreement (the Deed).

On XXX XXXX, Executor A and Executor B finalised and signed the Deed.

On XXXXX, the sale of the property settled.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

Question

Will the Commissioner exercise the discretion under section 118-195 of 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?

Summary

No, we will not exercise the discretion to grant an extension of time. It is arguable whether we consider the legal challenges a factor out of your control. However, we cannot allow an extension of time as these challenges did not begin until more than 5 years after the deceased passed away. The initial period of delay before the legal challenges was in your control and you could have made formal enquiries of the will prior to the end of the 2-year period.

Detailed reasoning

A capital gain or capital loss may be disregarded where a capital gains tax event happens to a dwelling if you owned it as the trustee or beneficiary of the deceased estate.

For a dwelling acquired by the deceased prior to 19 September 1985, 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.

In your case, the deceased acquired the property prior to 19 September 1985. 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.

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 provides guidance on factors we consider when deciding whether to grant the discretion.

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

Paragraph 14 of PCG 2019/5 explains we weigh up all the factors (both favourable and adverse). Paragraph 17 of PCG 2019/5 provides a list of other factors that may be relevant to the exercise of the Commissioner's discretion which includes the sensitivity of your personal circumstances.

In your case, we consider the legal challenges and lack of co-operation from Executor B as favourable factors. However, a significant period of more than 2 years passed before Executor A and Executor B engaged solicitors. We consider the legal challenges insufficient to outweigh the material period of inactivity leading up to these events.

We also considered the fact that neither of the executors made any attempt to sell the property in the initial 2 years. After several years of unsuccessful attempts to discuss the estate with Executor B, Executor A did not attempt to formally enquire about the will until after the end of the 2-year period. The payment of $XXXXX, which was an informal payment cannot be construed as purchase of Executor A's share of the property, nor does it have any impact on extending the 2-year period.

It is arguable whether we consider the legal challenges a factor out of your control. However, we cannot allow an extension of time as these challenges did not begin until more than 5 years after the deceased passed away. The initial period of delay before the legal challenges was in your control and you could have made formal enquiries of the will prior to the end of the 2-year period.

Having considered the relevant facts, we will not apply the discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the 2-year time limit. Therefore, 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. The cost of repairs can also be included in the cost base of the property. You are also entitled to the 50% CGT discount in relation to the property.