Edited version of private advice

Authorisation Number: 1052324272255

Date of advice: 14 November 2024

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise the discretion under section 118-195 of 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. Having considered the relevant facts, the Commissioner will not apply the discretion under section 118-195 as the process of subdividing the property is considered a factor that cannot be material to the delay in the disposal of the property.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased purchased XX XXX, XXX, XXX ('the Property') in XXX 19XX (pre-CGT).

The Property was the main residence of the deceased until they moved into an aged care home in or around XXX 20XX.

You moved into the aged care facility with the deceased to assist in caring for them.

During this time, the Property was rented out on or around XXX 20XX until the death of the deceased.

At this time, you were employed as a doctor at the XXX Hospital ('the hospital').

The deceased died on XX XXX 20XX.

On XX XXX 20XX, the deceased signed their last Will and Testament appointing their children, as executors and trustees of the Will.

You were bequeathed the Property.

After the death of the deceased, you rented the Property out until it was sold in 20XX.

You applied for a grant of probate in XXX 20XX.

Grant of probate was obtained by you on XX XXX 20XX.

On XX XXX 20XX, the certificate of title of the Property was transferred into your name.

You resigned from your role as XXX for the hospital around XX XXX 20XX.

On XX XXX 20XX, you sought valuation of the Property as you wished to subdivide it into X equal lots and sell the land.

The Property was valued between $XXX to $XXX.

You disputed this amount and requested the valuer rectify the valuation report.

You engaged a project management firm to oversee the subdivision application however you subsequently terminated the engagement on or around XXX 20XX.

From XX XXX to XX XXX 20XX, you were in isolation unwell.

Around XX XXX 20XX, your child contracted covid-19 and you took sick leave to care for them.

On XX XXX 20XX, you were required to travel to another state to assist with the care of your grandchild until approximately XX XXX 20XX.

On XX XXX 20XX, you travelled to another state to attend a funeral of a friend and assist with family arrangements.

On XX XXX 20XX, a subdivision application was lodged with the Council for the Property ('the application').

The application involved demolishing the dwelling and subdivide the land into X residential lots.

On XX XXX 20XX, the Property was inspected for valuation.

The market value as at XX XXX 20XX was $XXX.

The application was determined and approved on XX XXX 20XX.

The Property was sold on XX XXX 20XX for $XXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

The main residence exemption in section 118-110 of the ITAA 1997 applies to disregard a capital gain or capital loss a taxpayer makes from a capital gains tax (CGT) event that happens to a dwelling that is their main residence.

If a taxpayer inherits an ownership interest, subsection 118-195(1) of the ITAA 1997 applies so that any capital gain or capital loss they make from a CGT event that happens in relation to a dwelling or their ownership interest in a dwelling is disregarded if:

•         They are an individual and the interest passed to them as a beneficiary in a deceased estate, or they owned it as the trustee of a deceased estate; and

•         The deceased acquired the ownership interest 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

•         Their ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner.

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 Practical Compliance Guideline PCG 2019/5 'Capital gains tax and deceased estates - the Commissioners discretion to extend the 2-year period to dispose of dwellings acquired from a deceased estate' ('the PCG') outlines the circumstances that must have taken more than 12 months to resolve being:

•         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 13 of the PCG contains a non-exhaustive list of circumstances that cannot be material to delay in disposal being:

•         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.

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

Application to your circumstances

Although there were a number of other factors which caused short delays, none of these took longer than 12 months to resolve as required in paragraph 12 of the PCG. The delay in selling the property was due mostly to the process you undertook to subdivide the property. This is considered a factor within your control and falls under paragraph 13 of the PCG as a factor that cannot be material to the delay. Whilst we appreciate it was the deceased's wish that you undertake to subdivide the property, this is not a factor we can consider for the purposes of assessing eligibility for the Commissioners discretion to extend the 2-year disposal.

Having considered the relevant facts, we will not apply the discretion under subsection 118-195(1) to allow an extension to 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 your cost base for the property is the market value on the deceased's date of death. Australian tax residents are entitled to the 50% CGT discount in relation to the property.