Edited version of private advice

Authorisation Number: 1052334594851

Date of advice: 26 November 2024

Ruling

Subject: Commissioner's discretion - deceased estate

Question 1

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 of the dwelling and up to 2 hectares of adjacent land?

Answer 1

No. 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 two-year time limit.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

XX XX 20XX

Relevant facts and circumstances

Person A passed away on XX XX 20XX.

The dwelling is located at XXXX (the property).

The property was acquired after 20 September 1985.

The property is situated on more than two hectares of land.

The property was owned jointly as tenants in common with Person B.

Person A left a Will which granted Person B the right to reside in the property for the remainder of their life.

Person B (the deceased) passed away on XX XX 20XX.

The property was the main residence of the deceased just before they passed away and was not used to produce assessable income at that time.

The sale of the property was managed by the executors of the estate of Person A and the executors of the estate of Person B.

As the property was owned as tenants in common the executors of both estates worked together by formulating a plan to dispose of the property.

From XX 20XX to XX 20XX COVID-19 restrictions were introduced for XXX.

It was determined via valuations that selling the property as a private residence would return a sale value less than if the property was sold for development. The executors decided it would be most appropriate in fulfilling their roles to maximise the value for the beneficiaries and continue discussions for sale to developers.

On XX XX 20XX Probate was granted for the deceased.

In XX 20XX an offer from Company A Consulting Services was accepted by all executors.

On XX XX 20XX Company A Consulting Services provided the executors with a draft Call Option Deed to prepare the sale contract.

On XX XX 20XX a 12-month extension period was agreed to by the executors.

In XX 20XX the Call Option Deed was signed by the executors.

In mid-20XX the property was rented to a tenant until settlement occurred.

On XX XX 20XX you received Notice of Exercise of Call Option dated XX XX 20XX confirming the option has been exercised.

You entered into a contract to sell the property on XX XX 20XX with settlement occurring on XX XX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

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 after 19 September 1985, that was the deceased's main residence and not used to produce assessable income just before their death, 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 after 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 just before they passed away and was not used to produce assessable income at that time.

The property sale 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 PCG 2019/5. The Commissioner's discretion to extend the two-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 of PCG 2019/5 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 of PCG 2019/5 explains we weigh up all of the factors (both favourable and adverse). Paragraph 17of PCG 2019/5 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.

In your case, we consider as favourable factors:

•                     The deceased's right to reside in the property for the remainer of their life.

•                     The complexity of facilitating the sale of the property with multiple executors.

•                     The period COVID-19 restrictions impacted the usual actions taken by real estate to sell a property.

We also considered:

•                     That the option to sell the property as is within the 24-month period was available to you.

•                     The decision you made to sell to developers knowing that settlement would likely not occur within 24 months.

•                     The property was used to produce assessable income after the deceased passed away, up until the date the property was sold.

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 two-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 also entitled to the 50% CGT discount in relation to the property.