Edited version of private advice

Authorisation Number: 1052281475361

Date of advice: 26 July 2024

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise the discretion to extend the 2-year period under section 118-200 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2024

Year ending 30 June 2025

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

You are the Executor of the Deceased Estate.

Your spouse (the Deceased) passed away leaving a Will.

The Company was incorporated.

The Company acquired the Property of which it currently owns under a company title arrangement.

The Company's Constitution provides:

•         the initial issued capital of the company shall consist of ordinary shares divided into share groups as set out below:

Table 1: The company's constitution provides the initial issued capital of the company shall consist of ordinary shares divided into share groups as set out below:

•         that the holder of each share is entitled to the absolute and exclusive use, occupation and enjoyment of their respective residential unit contained in the Property.

The Deceased continuously held the Share in the Company from the date he purchased the Share, until his death. The Share entitled the Deceased to occupy a specified unit in the Property.

The Deceased lived in Unit XX of the Property as his main residence from the time he purchased the Share until around early July 20XX.

Unit XX of the Property was not the Deceased main residence at the time of his death.

The Property was not used to produce assessable income.

Prior to the death of the Deceased, as a director of the Company resolved to convert the Property from company title to strata title. It was intended, following the title conversion, that the Company would transfer title to the portion of the Property that represented the interest in Unit XX to the Deceased.

The title conversion was delayed due to COVID-19 and the Deceased's enduring periods of very serious illness.

At the time of the death of the Deceased, the process of title conversion was largely completed, with registration of the strata plan and allocation of the strata units yet to be finalised.

Probate was granted to you.

The title conversion was again delayed due to the share entitlement change of the neighbouring unit. The agreement of the title change was required from the new owner under the Company's Constitution.

A provision of the Company's Constitution states, the Company must be sent notice in writing of the person becoming entitled to the Share. You gave notice to the shareholder of the Company that the share was to be transferred to you as the Executor.

By virtue of holding the Share, the Executor is entitled to use and occupy Unit XX.

The directors of the Company continued to progress the title conversion. The steps remaining to be completed are:

•         register the strata plan.

•         transfer full ownership of the units to each of the owners.

Once the strata plan is registered, full ownership of Unit XX will be transferred from the Company to the shareholder at that time.

No consideration is being paid by the shareholders for the transfer.

You have received an offer for the purchase of the Share in the Company.

You intend to sell the Share in the Company prior to any title conversion.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-200

Reasons for decision

Subsection 118-195(1) states that a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if:

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

•      both of the following requirements are satisfied:

o   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

o   your ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner; and

•      the deceased was not an excluded foreign resident just before the deceased's death.

Where the dwelling was not the main residence of the deceased just before their death, section 118-200 of the ITAA 1997 allows a partial main residence exemption for the period that the deceased used the dwelling as their main residence.

Subsection 118-200(2) of the ITAA 1997 outlines the method to calculate the capital gain or loss using the following formula:

CG or CL amount × non-main residence days ÷ total days

Where:

•         CG or CL amount is the standard capital gain or loss you would have made from disposal of the dwelling, the subtraction of your cost base of the CGT asset from the capital proceeds of the CGT event.

•         Non-main residence days is the sum of:

o   The number of days in the deceased's ownership period when the dwelling was not the deceased's main residence; and

o   The number of days in the period from the death until your ownership interest ends

•         Total days is the number of days in the period from the acquisition of the dwelling by the deceased until your ownership interest ends.

However, subsection 118-200(3) of the ITAA 1997 outlines that you can adjust the formula to ignore any non-main residence days and total days in the period from the deceased's death until your ownership interest ended if your ownership interest ends within two-years of the deceased's death, or a longer period allowed by the Commissioner.

Practical Compliance Guideline PCG 2019/5 Capital gains tax and deceased estates - the Commissioner's discretion to extend the 2-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 delay in the sale of the dwelling was due to reasons beyond your control.

Paragraph 11 of PCG 2019/5 outlines the conditions of the safe harbour compliance approach as follows:

•         to qualify for the safe harbour, you must satisfy all of the following conditions:

o   during the first two years after the deceased's death, more than 12 months was spent addressing one or more of the circumstances described in paragraph 12 of this guideline

o   the dwelling was listed for sale as soon as practically possible after those circumstances were resolved (and the sale was actively managed to completion)

o   the sale completed (settled) within 12 months of the dwelling before listed for sale

o   if any of the circumstances described in paragraph 13 of this guideline were applicable, they were immaterial to the delay in disposing of your interest, and

o   the longer period for which you would otherwise need the discretion to be exercised is no more then 18 months.

Paragraph 12 of PCG 2019/5, lists situations the Commissioner would exercise the discretion where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example:

•         the ownership of the dwelling, or the will, is challenged

•         a life tenancy or other equitable interest given in the will delays the disposal of the dwelling

•         the complexity of the deceased estate delays the completion of administration of the estate

•         settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of your control, or

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

Paragraph 13 of PCG 2019/5, provides 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

•         renovations or other activities designed to increase the sale price, or

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

All of the factors (both favourable and adverse) are weighed up when considering whether to extend the 2-year period. (Paragraph 14 of PCG 2019/5).

In your case:

•         the Executor required clarity on the taxation impactions of the conversion of the Property from company title to strata title and acted prudently in seeking legal advice and making the Private Ruling Application.

•         the Private Ruling Application was made well in advance of the 2-year period expiring.

•         a second application was submitted after receiving no acknowledgment of the first application being received.

•         late acknowledgment of the application by the ATO which cause further delays.

•         the Executor suffers from a debilitating illness and has had two bouts of COVID during this time, still been proactive and engaged a real estate agent to sell unit XX of the Property once the taxation positions was clarified by the Commissioner.

•         due to delays the Executor decided to sell the unit XX of the Property and not proceed with the title conversion.

The complexity of the Estate and the delays have been due to circumstances outside of the control of the Executor.

Therefore, the Commissioner will exercise the discretion to extend the 2-year period under section 118-200 of the ITAA 1997 to the 30 June 2025.