Edited version of private advice

Authorisation Number: 1052296576662

Date of advice: 27 August 2024

Ruling

Subject: CGT - deceased estates - 2 year discretion

Question 1

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 property and disregard the capital gain or capital loss you made on the disposal?

Answer 1

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, XX XX XX, passed away on XX XX 20XX.

The deceased acquired their ownership interest in the property at XX XX XX, XX, XX on XX XX 19XX.

The property was their main residence and never used to produce income.

The property is less than 2 hectares.

The deceased permanently moved to residential care in XX 20XX, and the property remained vacant.

The deceased's Will appoints XX XX (XX) and their spouse XX XX (XX) as executors of the estate. XX and XX resided in a different state to the deceased.

On XX XX 20XX probate was granted.

On XX XX 20XX lawyers for the estate, XX XX, received correspondence of a potential challenge to the Will by the deceased's grandchildren. The executors waited for a period of 6 months for claimants to make a claim on the estate. No claim was received.

In January 20XX plumbing work was done at the property, including installation of a new hot water service and repair to burst water pipes.

In April 20XX plaster repair and painting was undertaken at the property.

In January and February 20XX the property was cleared via skip bins.

XX was the surviving executor for the estate following the death of XX on XX XX 20XX.

On XX XX 20XX XX advised the estate's lawyers that they had been unable to deal with estate matters due to their spouse's death and their own health issues.

On XX XX 20XX XX passed away. There were issues with their Will and death certificate that caused a delay in probate being granted for their estate. In January 20XX COVID-19 was declared a Public Health Emergency of International Concern. Subsequent lockdowns in Australia exacerbated the granting of probate for their estate.

XX Will appoints XX XX as executors. Probate was granted on XX XX 20XX.

XX Will appoints XX XX (XX) and XX XX (XX) as executors. The chain of executorship passed to the executors of XX estate.

On XX XX 20XX probate was granted in XX for XX estate to XX, with XX applying for leave reserved.

On XX XX 20XX XX renounced their role as executor for the deceased's estate.

XX is a relative of XX and acts under double probate as an executor for XX and the deceased. XX had leave reserved for the estate of XX, but not the deceased.

On XX XX 20XX an application for grant of probate de bonis non was filed in XX for XX. XX application for grant of probate de bonis non was withdrawn on XX XX 20XX.

The court did not accept the application because it was considered that there was no break in the chain of executorship. XX and XX as the executors named in XX Will were entitled to administer XX estate by right of representation.

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

XX attended to the property in XX (as part of XX estate) as they wished to make this their main residence.

The deceased's property was listed for sale in XX 20XX with settlement occurring on XX XX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

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 before XX September 19XX, 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 before XX September 19XX. 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 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 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:

•                     the property was not used for income producing purposes

•                     administration of the estate was affected by deaths of the executors.

We also considered:

•                     there was no challenge to the ownership of the property or to the deceased's will

•                     there were no factors from the time of the executors' deaths that explain the trustees' inability to attend to disposing of the property. Although there was delay in granting of double probate to XX, this did not affect the executor's ability to dispose of the property in XX XX estate

•                     XX property became XX priority to resolve before attending to the deceased's property

•                     there was no delay in settlement of the contract of sale over the property.

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 delay the sale of the property rather than selling it, this remains a choice and therefore in these circumstances an extension of time will not be granted. In your case, disposal of the property took more than five years.

Having considered the relevant facts, we will not apply the discretion under subsection 1180195(1) of the ITAA 1997 to allow an extension of the two-year time limit.

Therefore, the normal CGT rules will apply to the disposal of the property. You should note that the first element of the cost base is its market value on the deceased's date of death. The cost of repairs can be included on the cost base of the property. You are also entitled to the 50% CGT discount in relation to the property.