Edited version of private advice

Authorisation Number: 1052281439401

Date of advice: 25 July 2024

Ruling

Subject: CGT - deceased estate

Question 1

Will the safe harbour requirements of Practical Compliance Guideline PCG 2019/5 be satisfied in order for the Commissioner to exercise his discretionary powers in section 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the 2-year period to dispose of the dwelling?

Answer

No.

Question 2

If the answer to question 1 is no, will the Commissioner exercise his discretion to extend the 2-year period to dispose of dispose of the dwelling?

Answer

No.

Question 3

If the answer to question 1 or question 2 is yes, will the capital gain on the disposal of the dwelling in the income year ending 30 June 20YY be disregarded under section 118-195(1) of ITAA 1997?

Answer

N/A

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

XX XX (the deceased), acquired an ownership interest in a residential property at XX XX, XX, XX (the property) when their spouse passed away on XX XX 20XX.

Title of the property was transferred to the deceased on XX XX 20XX.

The property is less than 2 hectares.

The property was the deceased's main residence and never used to produce income.

The deceased was not an excluded foreign resident.

There were no capital improvements on the property from the time of its build until its disposal.

On XX XX 20XX the deceased moved to permanent residential care and the property was left vacant.

On XX XX 20XX the deceased passed away.

On XX XX 20XX a coroner's report regarding the death was completed.

The deceased's will appoints XX XX (XX), XX XX (XX) and XX XX (XX) as executors.

XX had pre-deceased the deceased.

Following the death of their parent, XX was occupied with arranging the demolishment and build of a new house and on XX XX 20XX returned to full time work.

Following the death of their parent, XX contended with XX XX XX. The first was lodged with the XX XX on XX XX 20XX. The ombudsman took no action but referred the complaint to the XX XX XX XX XX (XX) on XX XX 20XX. The complaint was dismissed in XX 20XX. The second complaint was lodged with XX in XX 20XX and was later dismissed by XX in XX 20XX. In both instances XX engaged legal advice.

In XX 20XX XX was promoted to XX XX XX with XX and began working with XX XX. After XX 20XX XXX's work then changed to consultancy work.

In XX 20XX XX underwent XX surgery.

On XX XX 20XX probate was granted to XX and XX.

In XX 20XX the executors reached agreement regarding the estate.

Between XX and XX XX 20XX debris was removed from the property, including a motor vehicle and aviary cages, and the property was tidied and cleared.

Between XX and XX XX 20XX electrical repairs and update was done to the property.

On XX XX 20XX the property was listed for sale with settlement occurring on XX XX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Question 1

Will the safe harbour requirements of Practical Compliance Guideline PCG 2019/5 be satisfied in order for the Commissioner to exercise his discretionary powers in section 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the 2-year period to dispose of the dwelling?

Detailed reasoning

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 (PCG 2019/5) outlines the factors that the Commissioner will consider when determining whether or not to exercise the discretion to extend the two -year period under section 118-195 of the ITAA 1997.

Generally, the Commissioner will allow a longer period where the sale of the dwelling was delayed due to reasons beyond your control.

The executor or trustee of the deceased estate must satisfy 5 conditions to qualify for the safe harbour.

The first condition is that, during the initial 2-year period after the deceased's death, over 12 months are spent addressing one or more of the following circumstances:

•         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

•         administration of the estate is delayed due to the complexity of the deceased estate;

•         settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of the trustee's/beneficiary's control;

•         restrictions on real estate activities imposed by a government authority in response to the COVID-19 pandemic.

The second condition is that the dwelling must be listed for sale as soon as practically possible after those circumstances are resolved.

Three, the sale must be settled within 12 months of the listing.

Four, the following factors are immaterial to the delay in disposing of the dwelling and would weigh against the Commissioner allowing a longer period:

•         waiting for the property market to pick up before selling the dwelling

•         delay due to refurbishment of the house to improve the sale price

•         inconvenience on the part of the trustee or beneficiary to organise the sale of the house, or

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

The final condition requires that there be no more than an 18-month extension to the 2-year period for disposal.

In the event that the safe harbour conditions are not met, the PCG also outlines factors that the ATO may consider when weighing up whether or not to exercise the Commissioner's discretion:

•         the sensitivity of the trustee's/beneficiary's personal circumstances and/or of other surviving relatives of the deceased

•         the degree of difficulty locating all beneficiaries required to prove the will

•         any period the dwelling was used to produce assessable income, and

•         the length of time the trustee/beneficiary held ownership interest in the dwelling.

Paragraph 14 of PCG 2019/5 explains we weigh up all of the factors (both favourable and adverse).

In your case, there was no challenge to the ownership of the property or the deceased's will.

There was no life interest in the deceased's will that caused a delay in the disposal of the dwelling.

There were no complexities regarding the deceased estate. There were no extenuating circumstances that are considered complex that prevented the estate being administered. There were no challenges to the executors and they accepted their role to administer the estate.

A coroner's report does not affect the preparation or sale of a deceased estate property and is a separate issue to the administration of the deceased estate. Nor does a coroner's report delay the issue of a death certificate and therefore does not delay the application for grant of probate.

It has not been explained how the death of the third executor (XX) impacted the administration of the estate.

Covid restrictions did not prevent the sale of property in XX at this time. From XX 20XX open home viewings could be conducted by private appointment in XX. From XX 20XX there were no restrictions on open home viewings. Physical auctions were only prohibited until XX 20XX in XX.

On XX XX 20XX XX XX XX XX advised of the application of the Residential Care Visitor Access Code provided by the Australian Health Protection Principal Committee (AHPPC), Department of Health and Aged Care. State-wide Covid-19 restrictions were lifted in XX from XX XX 20XX to allow two visitors at a time to residential care homes, where they meet vaccination and public health requirements, and only placed a limit on the number of visits allowed in a day. On XX XX 20XX XX XX XX advised that, should they have a confirmed case of Covid-19 at any one of their homes, visitors would not be permitted in person; they advised they remained Covid-19 free.

There were periods of inactivity where it appears you did not actively take steps to apply for probate, nor did you attend to progressing the sale of the property. Considering there were no major repairs or renovations done to the property, the lengthy delays are unsupported.

Although we acknowledge you were bereaved, there were no unforeseen or serious personal circumstances arising such that both trustees were unable to attend to the estate's administration.

Personal disagreement on managing the estate, individual financial affairs, full-time work and related commitments are considered inconveniences on the part of the trustees in organising the sale of the house.

There was no unexpected delay for settlement of a contract of sale over the property.

The information provided in your application does not provide that the delay in selling the property was caused by any of the circumstances described as favourable factors as outlined in paragraph 12 of PCG 2019/5, for example, legal challenges to the ownership of the dwelling or challenges to the will.

Question 2

If the answer to question 1 is no, will the Commissioner exercise his discretion to extend the 2-yer period to dispose of dispose of the dwelling?

Detailed reasoning

Section 118-195 of the ITAA 1997 provides a capital gains tax (CGT) exemption to beneficiaries and trustees where a CGT event happened to a dwelling they acquired from a deceased estate if:

•         the property was acquired by the deceased before 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 with two years of the deceased's death or within a longer period allowed by the Commissioner, or

•         the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of:

o   the spouse of the deceased immediately be death, or

o   an individual who had a right to occupy the dwelling under the deceased's Will; or

o   the individual to whom the ownership interest is transferred as a beneficiary and is then sold by that individual.

The Commissioner's discretion is limited to situations where it was not possible for the trustee or beneficiaries to sell the property before the time it was actually sold. The intention of the two-year period is to allow the orderly and timely sale of deceased estate property. Although there will be circumstances in which it is understandable why the trustee or beneficiaries may decide to retain the property rather than selling it, this remains a choice and therefore in these circumstances an extension of time will not be granted.

As you did not dispose of your ownership interest within two years of the deceased's passing, you do not satisfy the conditions to be eligible for an exemption under section 118-195 of the ITAA 1997 unless the Commissioner's discretion to extend the two-year period is exercised.

Having considered the relevant facts, the Commissioner will not apply the discretion under section 118-195 of the ITAA 1997 to allow an extension to the two-year time limit for the reasons outlined above. Therefore, the normal 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. You are also entitled to the 50% CGT discount in relation to the property.