Edited version of private advice

Authorisation Number: 1052326203869

Date of advice: 5 November 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 of the property?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 June 20XX

Relevant facts and circumstances

The deceased acquired the property with their spouse as joint tenants in XX 19XX.

The property is less than 2 hectares.

The deceased passed away on XX XX 20XX.

The property was the deceased's main residence and never used to produce income.

Probate was granted on XX XX 20XX to the deceased's child as executor with their sibling as non-proving executor.

The property required necessary and useful repairs before being actively marketed for sale.

The executor attempted to obtain a loan to fund the necessary and useful repairs but was unsuccessful. They ultimately obtained financial assistance from a family friend.

Due to not having funds to engage contractors for the works, the useful repairs were conducted by the executor and family friends. With the following delays attributing to completing the useful repairs:

•         purchasing second hand material online

•         delays in obtaining material at a competitive or reduced rates

•         organising friends that were trades persons to carry out the useful repairs

•         delays in carrying out the work as this could only be done at a time that was convenient for the executor's friends which was outside of work hours.

The following necessary and useful repairs were conducted to the property between XX 20XX and XX 20XX:

•         sale of existing kitchen cupboards and replacement with cupboards in better condition which took several months

•         kitchen benchtops installed by XX XX

•         installation of second hand rangehood and pantry

•         replacement of a window and new glass for ensuite window

•         to improve the laundry, a second-hand laundry tub, plasterboard, washing machine taps, plumbing accessories, paint and accessories, MDF moulded skirt, plasterboard, water heater parts and hot water service

•         internal renovations removing plasterboard that required replacement, and installation of plasterboard conducted by hired plasterer

•         plaster sheets, cornices, internal paint, skirting boards, timber stain, flyscreens and security door key

•         plumbing works, including installation of bathroom accessories, white matt tiles, tile cutter, tile sealant, grout, waterproof paint, XX sheets of pebble tile, plumbing accessories and bathroom silicone

•         chrome rods, pine moulding, melamine, towel rings, skirting, bathroom shower-screens

•         new carpet purchased and laid by XX XX

•         timber and packers, related material, internal door and door seal, internal bi-fold door and internal glass bi-fold door

•         electrical work to install down lights, ceiling fans, vents, smoke alarm and security blinds

•         tradesperson to attend to hybrid flooring

•         roof paint, roof tiles, letter box, paint accessories, exterior paint, roller door motor and sensor light

•         side fence erected by contractors, garden sleeper, garden edging, garden material and garden plants.

By the XX XX 20XX, the necessary works and useful repairs were complete, with a total cost of $XX,XXX.

A contract of sale was entered on XX XX 20XX with settlement occurring on XX XX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-200

Reasons for decision

Section 118-195 of the Income Tax assessment Act 1997 (ITAA 1997) applies to whom an ownership interest in the dwelling passed as a beneficiary of a deceased estate.

A capital gain or capital loss may be disregarded where a capital gains tax 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, that was the deceased's main residence 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, the deceased acquired the property before 19 September 1985. After the deceased passed away, you owned the property as trustee of the estate. The property was the deceased's main residence until they passed away.

The property settled 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 2019/5 (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. Provides guidance on factors we consider when deciding whether to grant the discretion.

Paragraph 3 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 explains we weigh up all of the factors (both favourable and adverse) in regard to the facts and circumstances of your case.

Paragraph 17 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 including:

•         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.

Application to your circumstances

We have applied your facts and circumstances to the PCG 2019/5 noted above. We considered the property was not used for income producing purposes and was the main residence of the deceased.

We further considered, the significant time you held the property before putting on the market for sale.

There was no challenge to the ownership of the property or to the deceased's will causing delay to sell the property. There were no other significant factors provided that would delay selling the property.

Even though you contend this was not a refurbishment or improvement to the property, the delay in listing the property for sale was due to your choice to undertake necessary and useful repairs. Including making the decision to buy material second hand online and waiting for material prices that suited your allocated budget. Furthermore, the necessary repairs were further delayed due to waiting for family friends to undertake the works outside of business hours or on weekends.

Therefore, we do not consider your facts and circumstances that delayed selling the property within the 2 year discretionary period sufficient factors where we would allow an extension.

The Commissioner will not apply their discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension of the two-year time limit to dispose of the property.

Partial exemption for deceased estate dwellings

A main residence that the beneficiary disposes of more than 2 years after the death of the deceased that does not qualify for the full main residence exemption may qualify for a partial exemption. The partial exemption is based on the time the property was used as a main residence by the deceased, or the beneficiary, or a person who had a right to occupy the dwelling under the deceased's will, or the spouse of the deceased under section 118-200 of the ITAA 1997.

The normal CGT rules will apply to the disposal of the property and the first element of the cost base is its market value on the deceased's date of death. The cost for the necessary repairs can be included in the cost base and you are entitled to apply the 50% CGT discount on the capital gain on disposal of the property.