Edited version of private advice

Authorisation Number: 1052303461110

Date of Advice: 18 September 2024

Ruling

Subject: Capital gains - 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 for you to dispose of your ownership interest in the dwelling and disregard the capital gain or capital loss you 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 on DD MM 20YY.

The property is located at XXXX (the property).

The deceased acquired the property after 20 September 1985.

The deceased was residing at the property at the time they passed away, and the property was not being used to produce assessable income at that time.

The property was situated on less than two hectares of land.

You travelled to Australia from approximately DD MM 20YY to DD MM 20YY. Following the deceased passing away, your planned trip to Australia (ranging between DD MM 20YY to DD MM 20YY) was cancelled due a health concern.

You travelled to Australia from DD MM 20YY to DD MM 20YY to commence management of the estate of the deceased.

Probate was granted on DD MM 20YY. Following the grant of probate, the property title was transferred into your name (as tenant in common with another beneficiary) on DD MM 20YY.

You found returning to Australia to finalise the estate difficult for various reasons X and X.

To ensure the property was not left vacant until such a time the estate could be finalised, the property was rented out. The property was initially rented on a fixed-term lease from DD MM 20YY to DD MM 20YY. Followingthe expiry of that lease, it entered into a periodic lease which continued until DD MM 20YY.

An initial phone call was made to a sales representative on DD MM 20YY to commence the sale process, and a property valuation was conducted on DD MM 20YY. The property sale was settled on DD MM 20YY.

Relevant legislative provision

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 (CGT) 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 after 20 September 1985, 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 CGT exemption if the ownership interest ends within two years of the deceased's death. The ownership interest ends at the time of settlement of the contract of sale.

In your case, the deceased acquired the property after 20 September 1985. After the deceased passed away, you were living overseas and found returning to Australia to finalise the estate difficult for various reasons (such as health and financial concerns). To ensure the property was not left vacant until such a time the estate could be finalised, you chose to rent the property out.

The property sale 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 a full CGT exemption.

Practical Compliance Guideline PCG 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 12 of PCG 2019/5 provides the following list of circumstances, one (or more) of which much have taken more than 12 months to address:

•                     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 14 of PCG 2019/5 explains we weigh up all of the factors (both favourable and adverse) having regard to the facts and circumstances of the case.

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.

The property was acquired by the deceased after the introduction of CGT into the Australian tax system on 20 September 1985 and the property was used to produce assessable income after the deceased passed away.

Multiple variations of a rental lease were entered into between the date the deceased passed away until the property was sold. Based on the information provided, there is no clear hinderance that aligns with those in paragraphs 12 and 14 of PCG 2019/5 prohibiting you from selling the property.

As per paragraph 17 of PCG 2019/5 we add significant adverse weight to your decision to rent out the property as a reason why the Commissioner would not be exercising any further discretion beyond the initial two years from the date the deceased passed away.

Based on this, the Commissioner cannot apply the discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the two year time limit as there are no favourable circumstances present. Therefore, the normal CGT rules will apply to the disposal of the property. Please note that the first element of the cost base for the property is its market value on the deceased's date of death.