Edited version of private advice

Authorisation Number: 1052274393729

Date of advice: 17 July 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 to dispose of the ownership interest in the property (the Property) and disregard the capital gain 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 a number of years ago.

The property was purchased by the deceased and their late spouse prior to September 1985.

The property was purchased as tenants in common.

The deceased's spouse died several years ago leaving a life interest in the property to the deceased.

The property was the deceased's main residence just before they passed away.

The property was less than 2 hectares.

The property was never used to produce assessable income.

The deceased's child, Child A lived with them and their late spouse to provide caregiving duties.

The deceased died intestate.

The deceased's child, Child B was appointed as administrator of the estate.

Child A was involved in a business with a partner.

The partner left the business and Child A could not care for the deceased and work in the business. The business was a considerable distance from the deceased's home. Child A moved the deceased into their own home to continue with their caregiving duties.

The deceased asked a friend to live in the dwelling, rent free, during their absence.

The property had excessive amounts of hoarded goods arising from Child A's previous business, and only increased because Child A struggled to manage their business, caregiving duties as well as their personal grief for the loss of their parent. Externally, extremely limited effort was applied to maintain the property thus leading the property to fall into disrepair.

After the deceased's passing, the following was discovered:

•         No action was taken to resolve the estate of the late spouse (no probate applied for).

•         The estate issues of owning the property as tenants in common was discovered and combined with no action completed on the spouses' estate resulted in the assets of both the spouse and the deceased to be dealt with under the instructions of a will left by the deceased.

•         The family were advised that the deceased had a will when the original documents were returned to the spouse and the deceased from their lawyers. This led the family to genuinely believe that the deceased had a will.

•         Significant time and effort was spent by the family searching the property for the deceased's will; however, the family were unable to find any documents relating to the deceased's will.

•         As a result of no will, the deceased was considered to have died without a will and consequently their estate treated under the State intestacy laws.

During this period, the family were unclear on the intestate estate process, particularly who manages the administration.

Child B became aware that no action had been taken to administer the estate, and this needed to be addressed.

Child B and their own child (Child C) started to take control and drive the process. Child B sought legal advice on the action required to administer the estate.

Child B attempted to start the process but was unable to as they had no legal basis because they were not yet the administrator.

In the same year, Child A advised via letter that they did not wish to act in the capacity of either executor or administrator for either parent's estate.

Child B was appointed administrator of the deceased estate upon intestacy.

20XX year

Child B now the administrator, considered arranging for the property to be sold.

They organised lawyers to prepare a letter to instruct the friend of the decease (living in the dwelling rent free as the caretaker) to vacate the premises.

The friend vacated the property. The dwelling was in a state of disrepair and many rooms completely full of hoarded goods. It was clear that it would be a massive undertaking to restore the dwelling to a liveable and sellable condition.

Spare bedrooms, bathroom, outdoor toilet, laundry, bungalow and carport were completely full of hoarded goods owned by the deceased and storage items owned by Child A.

Only the master bedroom, lounge, and dining room were liveable.

The family took the time to restore the property to a condition where it could be sold. The property continued to be unoccupied in this period.

Child C emailed real estate agents on behalf of Child B to prepare the property for sale. Knowing the sales process would lead to conflict, no further action was taken to prepare the property for sale, until there was a consensus between Child B and Child A.

20XX year

In the following year, new lawyers were engaged. Child B and Child C were unhappy with the lack of advice provided by the lawyers, specifically regarding the lack of clarity around who handles the tax affairs. They consistently asked the lawyers to attend to parts of the deceased estate including the tax affairs. No action or advice was provided regarding the correct handling of the estate's tax affairs.

In their time with the new lawyers, Child B and Child C dealt with a number of different points of contact, and this resulted in delays with each new lawyer being acquainted with the estate. Child B and Child C were unhappy with the slowness and inactivity arising from the consistent changeover to newer (and inexperienced) staff members.

20XX year

The following year, Child C emailed removalists to obtain a quote/price guide to remove the goods from the property.

The quote estimated extensive hours of work required to remove the hoarded contents from the property.

20XX year

Child B's in-law dies unexpectedly. The death diverts attention from the estate administration to provide support and assistance to Child B's child.

20XX year

Child B and Child C struggled to keep the sale of the property moving due to Child A's inaction to remove the items from the property. Numerous attempts to request the hoarded items be removed (to sell the property) were made but to no avail.

The real estate agent was contacted again to organise sale of the property. Child B provided written authorisation to advertise the property for sale at auction.

Shortly after the property was advertised for auction, Child A strongly indicated that they did not want the property sold at auction, expressing their desire to buy Child B's share of the property and settle the matter. Child B obliged and contacted the real estate agent to reverse their decision to sell the property at auction.

Child A however did not follow through on the purchase of Child B's share as they couldn't or wouldn't arrange finance to facilitate the transaction.

Child B and Child C engaged lawyers to contact Child A to remove their items from the property to enable the property to be sold.

Child D stepped in to replace Child C to assist Child B in their responsibilities as administrator.

20XX year

Child D allowed a child of Child A and their partner to move into the property.

This was contrary to the wishes of Child B. As administrator they were provided with legal advice, stating that allowing the family member to move into the property would prevent the progress of a sale.

By then the child of Child A had completed their move into the property, creating another set of complications regarding the sale, particularly around asking them to vacate the dwelling without damaging the harmony amongst the extended family.

Child D hand back the role of assisting Child B as administrator to Child C.

20XX to 20XX years

The global covid-19 pandemic began.

Initial contact was made with accountants requesting them to outline the tax rules, implications, and possible outcomes of selling the property.

Any other action however was prevented by severe lockdowns imposed by the government to combat the spread of covid-19. A number of days were impacted by severe lockdown restrictions. The real estate industry was impacted by covid-19 restrictions that hindered the ability to facilitate any sale.

Child B and Child C struggled to cope within this traumatic period within their own lives particularly with difficulties surrounding working from home. Trying to manage any estate matters was just too much to bear for them at that time.

20XX year

The majority of 20XX was spent attempting force a sale of the property. Multiple attempts from the administrator and their legal advisors were made.

Child A and Child B eventually agreed that Child A's child would acquire both Child A and Child B's share of the property.

Later in the year, a vendor statement was prepared to put the property on the market.

20XX year

A contract of sale was entered into, and it was insisted that settlement be prompt. The administrator was keen for the estate matter to be completed ASAP.

The settlement of the property occurred in the month after the contract of sale was entered into.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

The main residence exemption in section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to disregard a capital gain or capital loss a taxpayer makes from a capital gains tax (CGT) event that happens to a dwelling that is their main residence.

If a taxpayer inherits an ownership interest, subsection 118-195(1) of the ITAA 1997 applies so that any capital gain or capital loss they make from a CGT event that happens in relation to a dwelling or their ownership interest in a dwelling is disregarded if:

•         They are an individual and the interest passed to them as a beneficiary in a deceased estate, or they owned it as the trustee of a deceased estate; and

•         The deceased acquired the ownership interest 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

•         Their ownership interest ends within two years of the deceased's death, or within a longer period allowed by the Commissioner.

Where the deceased acquired the property prior to 20 September 1985, the dwelling was from the deceased death until your ownership interest ends the main residence of one of the following:

•         the spouse of the deceased immediately before their death (but not a spouse who was permanently separated from the deceased)

•         a person who has a right to occupy the property under the deceased's will

•         you, as a beneficiary, if you dispose of the property as a beneficiary.

Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example:

•         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).

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

Factors that would weigh against the granting of the discretion include:

•         Waiting for the property market to pick up before selling the dwelling.

•         Property used to earn assessable income.

•         Unexplained periods of inactivity by the executor in attending to the administration of the estate.

The above examples are not exhaustive.

In addition, once any circumstances preventing the sale of the Property have been resolved, the Property needs to be placed on the market as soon as possible to enable its disposal.

Application to your circumstances

The delay in selling the property was due mostly to inactivity in putting the property on the market for sale.

Although there were a number of sensitive issues such as the death of Child B's in-law, family dynamics to navigate and covid-19, none of these issues precluded the property being placed on the market.

The deceased passed away several years ago and the sale occurred only recently.

You have provided the Commissioner with a timeline of events.

While there are several periods of inactivity each year, with the largest gap of inactivity occurred from 20XX to 20XX (several years ago) where limited action was taken to an otherwise vacant property.

A family member unofficially occupying the property without authority from Child B and then covid-19 occurring preventing further action before the property is eventually sold.

We understand that the property had numerous items that needed to be removed, however the time taken to clear the items took considerably longer than we consider to be reasonable.

In this regard, we consider that the delay in removing the items was not outside your control.

It is for the above reasons that you do not meet the requirements for the Commissioner to extend the 2-year time period as the property could have been sold at an earlier stage.

Having considered the relevant facts, we will not apply the discretion under subsection 118-195(1) 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 the market value on the deceased's date of death. Australian tax residents are entitled to the 50% CGT discount in relation to the property.