Edited version of private advice

Authorisation Number: 1052323739473

Date of advice: 28 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 to allow an extension of time for you to dispose of your ownership interest in the dwelling and disregard thecapital gain or capital loss you made on the disposal?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On XX XX 20XX, the deceased XX XX XX passed away.

At their passing, the deceased was the sole owner of a property at XX XX XX.

The property was acquired in 20XX.

The property was the deceased's main residence and was not used for income producing purposes at any time. It remained vacant after the deceased's death, until the property was sold.

The property is less than 2 hectares.

The property was encumbered with a reverse mortgage to XX.

On XX XX 20XX, the Solicitor was contacted by the Executor.

On XX XX 20XX, the Executor emailed the Solicitor the signed Will, but was told that it didn't have a 'residue clause ('the earlier Will')', and so would not be proved by the Supreme Court. It did not deal with the majority of the assets and estate.

The earlier Will provided for Person A to be the Executor and Person B to be the substitute Executor.

In XX 20XX and XX 20XX, the Solicitor tried to contact Person A, but they either would not reply to the Solicitor for a few days or would reply through Person B.

Person B organised the funeral, which was difficult for them and the service had been delayed due to them living in State A.

In conversations between Person A and Person B, and speaking to friends of the deceased, Person B ascertained that the deceased had plans to draw up a formal Will with a solicitor.

Person B contacted the previous solicitor to request a copy of the unsigned Will.

Person B obtained the Will after showing the death certificate as proof. They forwarded the unsigned Will to the Solicitor.

Around the same time, Person A informed Person B that they wanted to be renounced from the Will. As such, Person B became the sole Executor (the Executor).

The solicitor arranged an appointment with the Probate Registrar in State A and State B as to the requirements for providing an unsigned Will.

On XX XX 20XX, it was advertised on the Supreme Court of State B website that the Executor was applying for letters of Administration.

In XX 20XX, the current Solicitor contacted the previous solicitor of the unsigned Will to ask if they would be willing to affirm an affidavit as to their instructions from the deceased.

The Solicitor prepared an Affidavit to send to the previous solicitor, the previous solicitor sought legal advice and amended the affidavit.

From XX 20XX to XX 20XX, the Executor organised for the house to be cleared.

During 20XX, a collection of personal items were sold.

In XX 20XX, furniture was sold.

In XX 20XX, the Solicitor received the signed affidavit from the previous solicitor.

From XX 20XX to XX 20XX, the Solicitor made enquiries with banks and other organisations regarding some documents that had been provided to them by the Executor.

In XX 20XX, the Solicitor received advise from Company A that an existing debt by the deceased, did not need to be repaid.

The Solicitor made enquiries regarding some shareholdings that the deceased held. The Executor instructed them not to follow that up as the costs would have outweighed any benefits of realising the assets.

In XX 20XX, the Solicitor received documents signed by Person A.

On XX XX 20XX, the Executor went to the Solicitor's office to sign the documents. The Executor had been away overseas prior to this.

In XX 20XX, the property was placed on the market for sale following the Deed of Settlement and Release being signed between the XX Trustee in Bankruptcy, the Executor and the Solicitor as parties to the Deed.

On XX XX 20XX, probate was granted to the Executor.

On XX XX 20XX, once probate was granted on the earlier Will, the property was transferred to the name of the Executor just prior to auction.

On XX XX 20XX, a contract for sale was entered into for the property.

On XX XX 20XX, the contract was finalised.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Issue

Commissioner's discretion - deceased estate

Summary

The Commissioner will not exercise their discretion under section 118-195 of the Income Tax Assessment Act 1997 to extend the period for disposal as you have not met the relevant criteria for disposal.

Detailed reasoning

Subsection 118-195(1) of the Income Tax Assessment Act 1997 states that if you owned a dwelling that passed to you as a beneficiary of a deceased estate (or in your capacity as the trustee of a deceased estate), then you disregard any capital gain or loss made on the disposal of the property if:

•                     the property was acquired by the deceased before 20 September 1985 or

•                     the property was acquired by the deceased on or after 20 September 1985 and the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income

and

•                     your ownership interest ends within 2 years of the deceased's death (the Commissioner has discretion to extend this period in certain circumstances) or

•                     the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of:

-                        the spouse of the deceased immediately before the death or

-                        an individual who had a right to occupy the dwelling under the deceased's will or

-                        if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary - that individual.

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.

Factors that would weigh in favour of allowing an extension include the following:

•                     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.

Factors that would weigh against allowing an extension include the following:

•                     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, executor 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.

In considering whether to extend the 2-year period, we weigh up all the factors (both favourable and adverse) having regard to the facts and circumstances of the case.

The property sale settled more than 3 years after the deceased's death. Therefore, you require the Commissioner's discretion to extend the 2-year period to be eligible for an exemption.

The delay was attributable to the deceased's estate not being transferred to the Executor while they awaited finalisation of the previous Will and for probate to finalise. and therefore the Executor not officially owning the deceased's property. This is a choice that the Executor made to await the outcome of the aforementioned. The property could have been sold under the estate prior to the date that it was actually sold as the Executor had a current Will that they could have used.

The Commissioner's discretion is limited to situations where it was not possible for the trustee, executor 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, executor 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 three 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. You are entitled to the 50% CGT discount in relation to the property.

You may find the following reference useful

QC 66055 Calculating CGT with a partial exemption

Partial exemption

Where a full exemption is not available the client may be entitled to a partial exemption under section 118-200 of the ITAA 1997.