Edited version of private advice

Authorisation Number: 1052329263805

Date of advice: 7 November 2024

Ruling

Subject: CGT - 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 ended 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

The deceased acquired the property at xx xx xx, xx xx (the property) with their spouse xx xx (deceased) as joint tenants in xx 19xx.

The property is less than 2 hectares.

The property title was transferred to the deceased in xx 20xx.

The deceased moved to residential care in xx 20xx.

A grandchild of the deceased stayed at the property for four months during 20xx.

The deceased's children moved some household items to storage while their parent was in residential care.

The deceased passed away on xx xx 20xx.

Probate was granted on xx xx 20xx.

The deceased's will (the will) appoints xx xx and xx xx as substitute executors as the spouse of the deceased had died.

The will directs that property of the deceased's estate be divided equally between their three children, with one third to be held on trust for the benefit of one of the deceased's children, unless that individual agrees that their legacy be transferred to them.

In xx 20xx the executors disputed an invoice, issued in xx 20xx, from the deceased's residential care and sought legal advice to have an audit of the charge. The matter was settled in xx 20xx.

In xx 20xx the executors received advice from xx xx regarding capital gains tax on sale of the property and the two-year period to dispose of the property and not incur capital gains tax and lodgement requirements for the estate and, if required, testamentary trust.

A child of the deceased and their two children occasionally stayed in the property during holidays.

The property required considerable clean up and removal of copious and assorted paraphernalia. The executors shared the responsibility to sort and clear the property on their weekends and times that suited their personal arrangements and commitments. The deceased's children undertook minor repairs on the property which were completed in xx 20xx.

In xx 20xx one of the executors prioritised repair and new appliance installation work on their own home.

In xx 20xx one of the executor's commenced seeking valuations for household items.

The executors experienced some health issues each that affected their ability to continue to sort and dispose of the clutter at the property. One of the executors experienced health problems that prevented for short periods to attend to clearing the property and the other experienced a physical condition that affected their ability to assist in clearing the property from xx 20xx for a period of 6 weeks.

The executors' personal relationship became strained and hindered cooperation and progress toward preparing the property for sale.

The executors were impacted by COVID-19 lockdowns and restrictions in xx which impacted movement and clearing of the property from xx 20xx until xx 20xx.

In xx 20xx a beneficiary advised they were being evicted from their rental property on xx xx 20xx and were experiencing difficulty in finding a new property to rent for themself and their 2 children. The executors considered their sibling and children residing at the property. Later in xx it was advised the eviction notice had been withdrawn.

In xx 20xx the garage of one of the executors is flooded due to a rainstorm and required clean-up which took approximately 1 week. Emergency services not called to attend the property.

In xx 20xx one of the executors is advised that their home will undergo refurbishment by the landlord and included kitchen and laundry fit out, new appliance installation and roof repair. The executor remained living at the rental property.

In xx 20xx the executors agreed to dispose of the property and have it listed for sale by xx 20xx.

From xx 20xx the executors attended to the property and prepared it for sale, including clearing rooms, garden pruning and tidying up and hard waste collection. One of the executor's continued to sort household items and seek a market for auction of items from the estate.

In xx 20xx remaining items at the property are boxes and transported, repairs are completed to the garage roof, decking is re-stained, and broken fence removed.

In xx 20xx painting and plastering is undertaken at the property. Further minor repairs, and sale and clearance of household items continued to xx 20xx.

In xx 20xx an electrician is engaged to update some household lighting as it was not to code. The kitchen was repainted.

Both executors continued to work and spent time travelling or holidaying throughout the period.

The property was listed for sale in xx 20xx and sells at auction on xx xx 20xx. Settlement occurred on xx xx 20xx.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

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.

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

We also considered the impact of COVID-19 restrictions in your State.

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

We took into account the 12-month period after the deceased's death and the time after COVID-19 restrictions were lifted. The delay in listing the property for sale was due to the executors' decision to undertake an inventory and assessment of the deceased's personal possessions. The delay in listing the property for sale was due to your choice to prioritise the cataloguing of your parent's memorabilia and researching the best return to be achieved via marketing or auction, and not due to any executor's inability to attend to the administration of the estate.

Furthermore, the necessary clearing of the property was further delayed due to the executors undertaking the work at their convenience. There were some health issues with the executors that prevented, at times, working on the property. However, this was sporadic and only for short periods; apart from a six-week period where one executor was not permitted any heavy lifting.

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.

There was no challenge to the ownership of the property or to the deceased's will causing delay to sell the property. Outside of COVID-19 restrictions, there were no other significant factors provided that explain the executors' inability to attend to disposing of the property.

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.

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.

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 2-year time limit. Therefore, the normal capital gains tax (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 its market value on the deceased's date of death. The cost of repairs can also be included in the cost base of the property. You are entitled to apply the 50% CGT discount on the capital gain on disposal of the property.