Edited version of private advice

Authorisation Number: 1052310871628

Date of advice: 15 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.

Because the deceased had a right to occupy the property, you are entitled to the partial main residence exemption under section 118-200 and 118-205 of the ITAA 1997.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

XX XXXX 20XX

Relevant facts and circumstances

The deceased was predeceased by their partner Person A.

Before 20 September 1985, Person A solely purchased the dwelling located on the property.

On XX XXXX 19XX, Person A passed and provided a right to occupy the property to the deceased. Upon passing of the deceased, the property would pass to you as the beneficiary.

The property is less than 2 hectares in size.

In 20XX, the deceased was aware that the property was within the RAAF base contamination (Polyfluorinated Alkyl Substances (PFAS)) that was declared a 'red zone'.

On XX XXXX 20XX, the deceased passed.

The property was the deceased's main residence at the time of their death and was not used to produce assessable income at this time.

The deceased was not a foreign resident at the time of passing.

The deceased lived in the property alone at the time they passed.

In XXXX 20XX, the property was transferred into your name.

From XXXX 20XX to XX XXXX 20XX, you were clearing out the dwelling and the shed on the property.

On XX XXXX 20XX, you were informed that the property may be affected by road upgrades.

On XX XXXX 20XX, you listed the property for sale.

In XXXX 20XX, you unlisted the property for sale.

For a period, you allowed your friend to move into the property. You did not enter a formal rental agreement with them; however, they paid the electricity bills for the duration of their stay.

From XXXX 20XX to XXXX 20XX, your child (Person B) and their partner (Person C) stayed at the property. You did not enter a rental agreement; but they did pay nominal rent. You reported the income received as rental income.

In XXXX 20XX, you were informed that the property would not be affected by the road upgrades.

Person B and Person C had the intention of purchasing the home from you but were unable to get a bank loan.

In 20XX, you continued to repair the property to make it more appealing to potential buyers.

While residing in the property Person C made the following repairs and improvements to the property:

•         Repaired leaking roof and the damaged gyprock.

•         Added concrete flooring to the shed which cost approximately $XX.

•         Added a patio on the property.

Person C added the concrete flooring because they were using the garage for their business at the time and preferred to use the property instead of renting a commercial space.

Person B and Person C moved out of the property when an alternative rental property was found.

In XXXX 20XX, the property was relisted for sale.

On XX XXXX 20XX, the property sold.

On XX XXXX 20XX, the property settled.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-200

Income Tax Assessment Act 1997 section 118-205

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 before 19 September 1985, 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, Person A acquired their ownership interest in the property before 19 September 1985 and left a right to occupy to the deceased. The property was the deceased's main residence until they passed. After the deceased passed away, you owned the property as beneficiary of Person A's estate. Due to the deceased's right to occupy, the property was unable to be sold within two years of Person A's death. As the beneficiary when you inherited the property, you're expected to list it for sale as soon as practicable.

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 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.

We also considered the following unfavourable factors:

•         From XXXX 20XX to XX XXXX 20XX, you were clearing out the dwelling and the shed on the property.

•         On XX XXXX 20XX, you listed the property for sale and then subsequently unlisted it on the XX XXXX 20XX. Property relisted in XXXX 20XX.

•         You allowed your friend to stay in the property for an unknown period. You were unable to provide the exact dates.

•         For a period, you allowed Person B and Person C to stay at the property.

•         The following improvements were made to the property after the deceased passed:

­   Added concrete flooring to the shed which cost approximately $XX. This improvement was made due to the partner wanting to use part of the property for their business.

­   Added a patio on the property.

•         In 20XX, you continued to repair the property to make it more appealing to potential buyers.

•         In XXXX 20XX, you were informed that the property would not be affected by the road upgrades. Person B indicated that they may be interested in purchasing the property. However, Person B and Person C subsequently moved out of the property in XXXX 20XX. This delayed the sale by an additional year.

We have also considered the following:

•         On XX XXXX 20XX, you were informed that the property may be affected by the XXX to XXX XXX Road upgrades. Specifically, you may have been affected by the XXX to XXX XXX - route alignment option A, where the existing road would be widened. You have provided no information that this option would have resulted in your property being acquired. The community was given the chance to respond to the proposed options and it was decided not to go forward with this option. This did not prevent you from selling the property during this time.

•         Person B indicated that they may be interested in purchasing the property if they were successful in obtaining a loan. However, they were not able to obtain a bank loan.

Having considered the relevant facts, we will not apply the discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the two-year time limit because you have not sold the property as soon as practicable after the deceased passed.

Because the deceased had a right to occupy the property you are entitled to the partial main residence exemption under section 118-200 and 118-205 of the ITAA 1997. You adjust the formula in section 118-205 of the ITAA 1997 to consider the times when the dwelling was the main residence of the deceased. The non-main residence days will be the period between the deceased death and the end of the ownership period. You should note that the first element of your cost base for the property is its market value on Person A's date of death. You are also entitled to the 50% CGT discount in relation to the property.