Edited version of private advice

Authorisation Number: 1052291791138

Date of advice: 19 August 2024

Ruling

Subject: Commissioner's discretion - deceased estate

Question 1

Will the Commissioner exercise the discretion under table item 1 of subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997)to extend the 2-year time period by which the pre-CGT half interest in Property A owned by the trustee for Mrs A's estate (the estate) ends?

Answer

Yes.

Question 2

Will the Commissioner exercise the discretion under table item 1 of subsection 118-195(1) of the ITAA 1997to extend the 2-year time period by which the interest in Property B owned by the estate ends?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 2023

Income year ended 30 June 2024

Relevant facts and circumstances

1.    Mrs A died on XX XX 20XX, shortly after the death of her late husband Mr A.

2.    At the time of Mrs A's death, she owned and beneficially held a pool of residential properties including:

Table 1: At the time of Mrs A's death, she owned and beneficially held a pool of residential properties including:

3.    Property B was acquired jointly with Mr A prior to 20 September 1985 and was the main residence of Mrs A during her lifetime. It has a land size of just over 2 hectares and was never used for income producing purposes.

4.    Property A was acquired jointly with Mr A prior to 20 September 1985 and consists of 3 adjoining units on a single block of land less than 2 hectares in size. It had always been used to produce assessable income and had never been occupied by Mrs A.

5.    Pursuant to Mrs A's will (where Mr A does not survive her), the Executors must administer the estate as follows:

•         to transfer Property C to Mr Xsubject to his payment of all principal sums and interest secured on the property by way of mortgage;

•         to give $XXX to Mrs A's god son; and

•         to hold the residue of the estate and divide amongst the (residuary) beneficiaries in the following shares:

•         10% to Mrs Y;

•         90% to the beneficiaries (based overseas) constituted by:

o   18% to Beneficiary A;

o   18% to Beneficiary B;

o   9% to Beneficiary C;

o   9% to Beneficiary D;

o   18% to Beneficiary E; and

o   18% to Beneficiary F.

6.    On XX XX 20XX, the Executors contacted Mrs A's nephew, Mr Z,to obtain information about the foreign beneficiaries.

7.    On XX XX 20XX, Mr Z advised the Executors that several foreign beneficiaries including Beneficiary F had predeceased Mrs A. The Executors were also informed about Beneficiary F's sonbut his whereabouts was unknown at that time.

8.    On XX XX 20XX, solicitors acting for Mr Y and Mrs Y urgently requested the Executors to transfer Property A in satisfaction of Mrs Y's claim in the residuary estate.

9.    Mr Y and Mrs Y occupied one of the adjoining units comprising Property A since 19XX. During their period of tenancy, the couple paid reduced rent and carried out maintenance works. In part, Mrs Y's preference over Property A was to guarantee their continued occupancy on the property because of their advanced age and her critically poor health.

10.  Continuous correspondences between the parties took place until Mrs Y's death on XX XX 20XX. Following her death, legal questions arose as to whether Mrs Y attained a vested interest in the estate prior to her death, necessitating the need for the Executors to seek judicial advice. The Executors were also met with challenges of identifying the other surviving foreign beneficiaries to obtain consent regarding the appropriation of Mrs Y's interest to Mr Y.

11.  On XX XX 20XX, the Executors identified a potential issue for probate applications in regard to the legal ownership of Property C causing further delays to the administration process.

12.  On XX XX 20XX, the Executors confirmed that Mrs A held beneficial interest in Property C through a related SMSF in which Mr A and Mrs A were members and directors of the corporate trustee.

13.  On XX XX 20XX, Mr X's wife Mrs X commenced litigation in relation to the appropriation of Property B by way of satisfying Mr X's interest in the estate.

14.  Between XX 20XX and XX 20XX, the Executors prepared the applications for probates during which necessary activities were undertaken including drafting inventories of property, searching for Binding Death Notifications in respect of the SMSF and seeking further advice from Counsel on matters relating to tax and the appropriate treatment of Property C.

15.  On XX XX 20XX, the Executors filed the applications for probate and were granted on XX XX 20XX.

16.  On XX XX 20XX, by reason of Mrs X's ongoing proceedings, Mr Z was requested to make further contact with the foreign beneficiaries in an effort to locate Beneficiary F's son. The Executors were required to ensure that all foreign beneficiaries were served with a Notice of Claim and be given opportunity to raise (if any) their respective family provision claims. At that point, further efforts by the family members to locate Beneficiary F's son were unsuccessful and the Executors were requested to commence their own searches.

17.  On XX XX 20XX, the Executors received a quotation for the internal clean out of Property B with a view to sell (subject to the court's determination of Mrs X's claim).

18.  On XX XX 20XX, the Executors engaged professional investigators situated overseas to search for Beneficiary F's son.

19.  On XX XX 20XX, the overseas firm advised that Beneficiary F's son relocated to another country after Beneficiary F's death in 20XX. The firm also advised that they were unable to conduct the necessary searches due to a lack of resources.

20.  On XX XX 20XX, the Executors engaged another firm to locate Beneficiary F's son but, as at XX XX 20XX had been advised that that firm was similarly unsuccessful.

21.  On XX XX 20XX, the Executors engaged a professional genealogy firm to undertake international searches to locate Beneficiary F's son and any surviving children of the foreign beneficiaries who may have predeceased Mrs A.

22.  On XX XX 20XX, the genealogy firm advised that they could not locate Beneficiary F's son. Further searches continued.

23.  On XX XX 20XX, the Executors made an offer of compromise in respect of Mrs X's claim, which she accepted on XX XX 20XX.

24.  In XX 20XX, the Executors became aware of a foreign bank account that belonged to Mr A.

25.  On XX XX 20XX, real estate agent inspected Property B and recommended necessary remedial works prior to sale. The scope of works involved major landscaping and removal of contents of Property B. Due to the large volume of landscaping works required, it took the Executors until XX XX 20XX to obtain a quotation from a willing contractor.

26.  On XX XX 20XX, the genealogy firm advised that Beneficiary F's son was located in another country.

27.  In XX 20XX, the Executors wrote to Beneficiary F's son but the letter was returned to Australia.

28.  Shortly after XX XX 20XX, the landscaping works for Property B were undertaken.

29.  On XX XX 20XX, the Executors executed a deed of settlement in respect of Mrs X's claim. Correspondingly, a court order was issued on XX XX 20XX giving effect to the settlement.

30.  On XX XX 20XX, Mr Y obtained probate of Mrs Y's estate (more than 2 years after her death in XX 20XX).

31.  On XX and XX XX 20XX, items from Property B were removed and were transferred to an auction house for sale.

32.  On XX XX 20XX, the Executors entered into an agency agreement for the sale of Property B.

33.  By XX 20XX, all items in Property B were removed and an intensive cleanout was completed. Necessary electrical repair works were conducted in XX 20XX.

34.  On XX XX 20XX, the Executors contacted the relevant foreign Consulate regarding an application for the Certificate of Executorship pertaining to the foreign bank account.

35.  On XX XX 20XX, Property B was sold at auction.

36.  In XX 20XX, the Executors obtained the judicial advice confirming Mrs Y's vested interest in the estate, in respect of which Mr Y maintained his preference over Property A. However, at this stage, the estate was still in the process of administration due to some unresolved issues on foot. As a consequence, the Executors could not determine Mr Y's exact entitlement until all issues were resolved and the administration process was finalised.

37.  The Executors were advised of Beneficiary F son's death overseas on XX XX 20XX.

38.  On XX XX 20XX, the settlement of Property B occurred.

39.  On XX XX 20XX, the Executors received a letter from the relevant foreign tax administrator requesting further information about the estate.

40.  On XX XX 20XX, the application for Certificate of Executorship was finalised pertaining to the foreign bank account.

41.  In XX 20XX, the Executors obtained a market appraisal of Property A and determined that its current market value exceeded Mrs Y's 10% residuary entitlement interest in the estate. The Executors offered Mr Y the opportunity to purchase the portion of the property that exceeded the value of his entitlement, but he advised that he no longer wished to retain Property A.

42.  On XX XX 20XX, Property A was sold and settled on XX XX 20XX.

43.  Additional complex matters had to be addressed in relation to the estate before administration was able to be completed and the residuary amounts could be calculated with any certainty. For example, the Executors sought a private ruling from State government in respect of stamp duty applicable to the transfer of Property C.

44.  The trustee for the estate (Executors) does not qualify for the safe harbour pursuant to paragraph 11 of 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 (PCG 2019/5).

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 118-130(3)

Income Tax Assessment Act 1997 section 118-195

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

Income Tax Assessment Act 1997 subsection 118-195(2)

Further issues for you to consider

This private ruling is confined to the questions in regard to whether the Commissioner will exercise the discretion under table item 1 of subsection 118-195(1) to allow a longer period by which ownership interests held by the estate in both Property A and B ends.

The Commissioner has not considered the estate's entitlement to disregard a capital gain or loss it made from the disposal of those properties pursuant to section 118-195 (or the extent to which a capital gain or loss it made can be disregarded). The time period by which an ownership interest in a dwelling ends is one of a number of conditions set out in section 118-195 which require satisfaction.

Reasons for decision

All subsequent legislative references are to the ITAA 1997.

Summary

The Commissioner exercises the discretion under table item 1 of subsection 118-195(1) to extend the time limit by which:

•        the pre-CGT half interest in Property A owned by the Trustee ended until XX XX 20XX; and

•        the interest in Property B owned by the Trustee ended until XX XX 20XX.

Detailed reasoning

Section 118-195 disregards any capital gain or loss made from a CGT event that happens in relation to a dwelling, or the taxpayer's ownership interest in it, where the following conditions are satisfied:

• the taxpayer is an individual to whom the ownership interest is passed as a beneficiary in a deceased estate, or the taxpayer owns the interest as a trustee of a deceased estate;
• either:
  • the ownership interest was acquired by the deceased before 20 September 1985; or
  • the ownership interest was acquired by the deceased on or after 20 September 1985 and the dwelling was the deceased's main residence just before their death and was not then being used for income producing purposes;
• either:
  • the taxpayer's ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner; or
  • from the time of the deceased's death until the taxpayer's ownership interest ends, the dwelling was used in one of the ways listed in column 3 of table item 2 of subsection 118-195(1);
• the deceased was not an excluded foreign resident just before their death; and
• the capital gain or loss made by the taxpayer arose from a CGT event listed in subsection 118-195(2).

PCG 2019/5explains how the CGT main residence exemption may apply to the disposal of a dwelling by a beneficiary or a trustee of a deceased estate and the factors which the Commissioner gives regard to in considering whether or not to grant an extension of time.

Paragraph 3 of PCG 2019/5 states:

Generally, [the Commissioner] will allow a longer period where the dwelling could not be sold and settled within 2 years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first 2 years.

Paragraph 12 of PCG 2019/5 sets out the circumstances favouring a longer period by which the taxpayer's ownership interest in the dwelling ends. They are:

•         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.

The Commissioner may also consider other factors relevant to the exercise of the discretion, as listed in paragraph 17 of PCG 2019/5 to include:

•         the sensitivity of your personal circumstances and of other surviving relatives of the deceased

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

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

•         the length of time you held the ownership interest in the dwelling.

Conversely, paragraph 13 of PCG 2019/5 sets out the circumstances that the Commissioner considers cannot be material to the delays in the disposal of the taxpayer's ownership interest. They are:

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

•         waiting for refurbishment of the dwelling to improve the sale price

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

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

Application to the trustee of the estate

For a dwelling that you have a contract for the happening of a CGT event, you have an ownership interest in it until your legal ownership of it ends (subsection 118-130(3)).

Therefore, the interest owned by the Trustee in Property B ended on XX XX 20XX and the pre-CGT half interest owned by the Trustee in Property A ended on XX XX 20XX. In either case, the ownership interest of the trustee for the estate did not end within 2 years of the death of Mrs A, thereby exceeding the statutory limit in column 3 of table item 1 of subsection 118-195(1).

The Commissioner considers it appropriate to exercise the discretion under table item 1 of subsection 118-195(1) to extend the time limit by which:

•         the pre-CGT half interest in Property A owned by the Trustee ended until the time at which that ownership interest ended on XX XX 20XX; and

•         the interest in Property B owned by the Trustee ended until the time at which that ownership interest ended on XX XX 20XX.

The basis for this decision includes the following:

•         the estates of both Mr A and Mrs A were highly complex and there were a number of extenuating factors outside the control of the Executors that delayed their administration (and the selling of the properties) for a significant portion of the first 2 years (and beyond), including:

o   the claims made by each of Mr Y and Mrs Y in respect of Property A and by Mrs X in respect of Property B respectively;

o   the time it took to locate individual beneficiaries, many of whom were based overseas; and

o   the time it took to determine the value of beneficiary entitlements to the residuary estate (as a consequence of, for example, the identification of foreign assets and the need for the claims made against the will to be resolved);

•        the need to bring Property B to a saleable condition;

•        the Executors were highly active throughout the period of administration;

•        the properties were listed for sale as soon as practically possible after each of the aforementioned circumstances were resolved; and

•        none of the factors in paragraph 13 of PCG 2019/5 were relevant to the delay in disposing of the properties.