Edited version of private advice

Authorisation Number: 1052317761225

Date of advice: 16 October 2024

Ruling

Subject: Commissioner's discretion - deceased estate

Question

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 interest in the Property owned by Person 2 ends?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 20XX.

Relevant facts and circumstances

Person 1 died on XX XX 20XX.

The Property was acquired by Person 1 in 19XX and, at the time of their death, was owned by them.

The Property was Person 1's main residence at the time of their death and was not being used for income producing purposes.

Pursuant to Person 1's will, Person 2 was appointed as executor and trustee of their estate. The terms of the will directed the trustee to pay or transfer the residuary estate, including the Property, to Person 2.

After a period of mourning, Person 2 began rectification works to prepare the Property for sale. These works included the rectification of a mould problem originated from a previous roof leak which made the Property unfit to live in.

Between XXX 20XX and XXX 20XX, the State Government imposed COVID-19 restrictions which delayed the preparation of the Property for sale.

Person 2's child had been diagnosed with a life threatening illness and was hospitalised in XXX 20XX. After their discharge from hospital, during the months of XXX 20XX to XXX 20XX, Person 2 attended to the care of their child six times a day.

On X XXX 20XX, significant storm damage occurred at the Property. An insurance claim was submitted by Person 2 on X XXX 20XX and the repair works in relation to this claim were completed by the insurer on X XXX 20XX.

On X XXX 20XX, a second storm damaged the Property. An insurance claim was submitted by Person 2 on the same date and the repair works in relation to this claim were completed by the insurer on X XXX 20XX.

On X XXX 20XX, a third claim was lodged with the insurer. The repair works in relation to this claim were completed by the insurer on X XXX 20XX .

On X XXX 20XX, Person 2 entered into an agency agreement for the sale of the Property. Due to matters beyond Person 2's control, the agreement was rescinded on X XXX 20XX.

On X XXX 20XX, Person 2 entered into an Auction Agency Agreement with a different real estate agency.

In XXX 20XX, the Property was sold at auction.

On X XXX 20XX, the Property was settled.

At all times after Person 1's death and before settlement, the property remained vacant.

Person 2 suffers from a medical condition which effected the amount of time they could work on the Property.

Person 2 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 question 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 Person 2's ownership interest in relation to the Property ends.

The Commissioner has not considered Person 2's entitlement to disregard a capital gain or loss she made from the disposal of the Property pursuant to section 118-195 (or the extent to which a capital gain or loss they 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

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:

•                     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 the taxpayer is an individual to whom the ownership interest 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 2019/5 explains 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, we 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 your circumstances

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 Person 2 in the Property ended on X XXX 20XX. The ownership interest of Person 2 did not end within 2 years of the death of Person 1 (on XX XX 20XX), thereby exceeding the statutory limit in column 3 of table item 1 of subsection 118-195(1).

Consequently, section 118-195 does not apply in respect of any capital gain or capital loss Person 2 made from the sale of the Property, unless the Commissioner extends the time limit.

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 interest in the Property owned by Person 2 ended until the time at which that ownership interest ended, i.e. X XXX 2024.

The basis for this decision includes the following:

•                     the initial need to bring the Property to a saleable condition (i.e. making it fit to live in)

•                     the delays caused by Person 2 and their child's poor health

•                     the delays caused by the imposition of the COVID-19 lockdown

•                     the damage caused to the Property by storms and the time it took the insurer to repair that damage (all beyond Person 2's control)

•                     the Property was 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 Property.