Edited version of private advice

Authorisation Number: 1052307794483

Date of advice: 23 October 2024

Ruling

Subject: Commissioner's discretion - 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 periods:

Year ending 30 June 20XX

Year ending 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 property was the main residence of the deceased just before they passed away and was not used to produce assessable income.

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

The deceased passed away without a valid will in place. As such, the State Trustees in the relevant State assumed control of the estate.

The next of kin and the State Trustees disagreed on the manner in which the estate was to be administered.

On DD MM 20YY the State Trustees relinquished control of the estate.

The State Trustees had been in discussions with other parties who claimed to have an interest in the estate.

The deceased's next of kin continued discussions with these parties and a Deed of Settlement was entered into on DD MM 20YY.

Subsequently, Letters of Administration were granted to you on DD MM 20YY.

The property was found to have significant issues such as wood rot.

These issues with the property already existed at the time the deceased passed away.

Following the advice of a real estate agent, repairs to the property commenced shortly thereafter. It was not a mandatory condition before the property could be sold that these repairs be conducted, but real estate agent advice to allow for a greater sales price compared to the likely sales price if it were sold in its existing condition.

The (unsigned) will of the deceased contained direction that their executor should examine all their personal belongings before distributing/donating/discarding - as the deceased had collected multiple items during their lifetime that could be valuable.

On DD MM 20YY a water main burst. This flooded the property, affecting parts of the exterior and interior of the property.

On DD MM 20YY you were advised to proceed with an insurance claim for damages caused by the flooding.

On DD MM 20YY you received an initial inspection report from your insurance agency.

On DD MM 20YY a building organisation conducted a site visit and inspection of the property in relation to the insurance claim for the flood damages. They provided an assessment report on DD MM 20YY.

On DD MM 20YY an inspection was conducted by Party C, where they took core samples of the soil for a lab analysis to be conducted.

On DD MM 20YY, Party C provided their report which indicated the soils beneath the house have been affected to a degree that a recommended drying out period should be observed for the soils to dry out. It was specifically noted in their report that they did not recommend that any rectification works be completed until the dwelling has stabilized. If rectification works are undertaken before the soil returns to equilibrium moisture level then there may be more movement of the foundations.

On DD MM 20YY a letter from the claims manager of your insurance claim also reiterated the waiting period should be adhered to before proceeding with any further works.

As at the date of this Notice of Private Ruling, the property has not been sold or settled.

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 (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 would be entitled to a full exemption if your ownership interest ends within two years of the deceased's death. Their ownership interest ends at the time of settlement of the contract of sale.

In your case, the deceased acquired their property after 20 September 1985 which was their main residence and not used to produce assessable income. After the deceased passed away, there were disagreements between you and State Trustees on the appropriate party to act as trustee of the deceased estate. Once State Trustees withdrew and you were appointed trustee of the estate, you began the process of having the property repaired with the intention of improving the sales price.

The property sale will settle 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 PCG 2019/5 Capital gains tax and deceased estates - 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 delay in the sale of the dwelling was due to reasons beyond your control.

PCG 2019/5 outlines a safe harbour compliance approach if certain conditions are met.

Paragraph 13 of PCG 2019/5 provides that in order to qualify for the safe harbour, none of the following circumstances can have been material to the delay in disposing of your interest:

•                     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.

As well as being disqualifying factors for the safe harbour, the above factors would also weigh against allowing an extension of time (see paragraph 16 of PCG 2019/5).

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

In you case, we consider as a favourable factor the legal dispute between yourselves and State Trustees over the appropriate party to act as trustee of the estate. However, this was resolved by DD MM 20YY when Letters of Administration were granted to you.

The (unsigned) will of the deceased contained direction that their executor review each item they owned to ensure nothing of value was accidentally discarded. However, this is a typical part of the process when administering an estate and would not take a matter of years.

The repairs conducted between your appointment as trustee on DD MM 20YY and the flood damage on DD MM 20YY were not a mandatory requirement before the property could be sold. These repairs amounted to a refurbishment of the property and were conducted only to improve the sales price.

The flood damage that happened while the refurbishment was being undertaken occurred more than X years after the passing of the deceased and approximately X years after your appointment as trustee of the deceased estate. It is clear that the choice to refurbish the property before putting it on the market has been a major contributing factor to the delay in the sale of the property.

Based on this, the Commissioner will not apply the discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the two year time limit. 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. You are also entitled to the 50% CGT discount in relation to the property.