Edited version of private advice

Authorisation Number: 1052265120292

Date of advice: 21 June 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 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

The deceased passed away on XX/XX/20XX.

The deceased owned a property (the property) that was acquired after 20 September 1985.

The property was the main residence of the deceased just before they passed away and was not used to produce assessable income at the time of death.

The property was situated on less than two hectares of land.

In 20XX, the deceased moved interstate to be closer to their child, Person A, to receive assistance with their independent living.

Person A was appointed as the executor of the estate.

Person A was unable to locate the deceased's original will to apply for Probate.

Person A experienced difficulties in travelling to State A as Person A was managing a business and was the sole carer of their child who suffers from several medical conditions. State border closures from 20XX also limited Person A's ability to travel to State A.

In XX/20XX, the business that Person A was managing was sold after efforts were made to maintain it after it's closure.

In XX/20XX, Person A instructed solicitors to apply for probate on the basis that the original will could not be located.

On XX/XX/20XX, Person A located the will and lodged an application for probate.

Probate was granted on XX/XX/20XX.

In XX/20XX, Person A travelled to State A to visit the property and to prepare it for sale. Person A decided to list the property for sale in XX/20XX or XX/20XX as this would be a preferred time to sell.

During XX/20XX and XX/20XX, Person A applied to replace lost title deeds and to transfer ownership of the property into their name as executor. Around this time, Person A experienced some issues with their hip which limited their mobility. Person A scheduled a hip replacement for XX/XX/20XX.

In XX/20XX, Person A's surgery was rescheduled to XX/XX/20XX due to heath issues.

In XX/20XX, the title deeds and transmission application were received for the property.

During XX/20XX and XX/20XX, Person A needed to wait for several weeks for medical clearance to fly to State A and prepare the property for sale. During this time, some minor repairs were carried out. Person A's sibling assisted in removing some of the furniture and personal effects from the property.

In XX/20XX, Person A appointed a real estate agent to sell the dwelling. Person A discussed the work that was required for the property, including painting, and agreed that the best time to start marketing the property would be XX/20XX. A stylist was appointed to furnish the property and marketing photographs were taken. The property was then placed on the market for sale.

In XX/20XX, a marketing campaign was launched to prepare the dwelling for sale.

In XX/20XX, conditional contracts were exchanged for sale.

The property was vacant from when the deceased moved interstate. It was then occupied by the deceased's relative from the date of death until XX/20XX. The property was then vacant until it was sold.

A contract was entered into to sell the property on XX/XX/20XX with settlement occurring on XX/XX/20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 118-195(1)

Reasons for decision

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 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.

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

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 of 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 as favourable factors, that the property was the deceased's main residence and was not used for income producing purposes.

We considered that the executor had caring duties for their child and was also experiencing challenges with the business that they were managing.

We considered that the deceased's will was not able to be located and Covid-19 border closures affected interstate travel.

We also considered that the executor experienced health issues and required surgery.

We have determined that insufficient activity occurred to dispose of the property from the date of death until it was sold. Covid-19 border closures commenced more than a year after the deceased passed away and there were periods of time when the borders were open, and travel was possible. Although the executor required surgery, this occurred almost four years after the deceased passed away.

Furthermore, when the executor did access the property, they decided to delay the sale further and intended to list the property for sale several months into the future, choosing this time as it was 'a preferred time to sell'.

The property could have been sold without the changes that were made and without the need for a stylist to furnish it to prepare it for sale.

In addition, there is no information to indicate there has been a challenge to the will, the estate was of a complex nature and that there were unforeseen or serious personal circumstances preventing the sale of the property.

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 two-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 discount2 in relation to the property.