Edited version of private advice

Authorisation Number: 1052343471127

Date of advice: 16 December 2024

Ruling

Subject: Commissioner's discretion - deceased estate

Question 1

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?

Answer

No.

Question 2

Will the cost base of the property, for capital gains tax, be based on the value of the property on the date the deceased passed away?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

DD MM 20YY

Relevant facts and circumstances

The deceased passed away on DD MM 20YY.

The property is located at XXXX (the property).

The deceased acquired the property before 20 September 1985.

The property is less than two hectares in size.

The will of the deceased provided Person A with financial assistance from the estate to arrange appropriate accommodation. As such, Person A was allowed to reside in the property until they passed away on DD MM 20YY.

COVID-19 pandemic, including various stages of lockdown, the property could not be prepared for sale.

Between late 20XX and mid 20YY, maintenance and repairs were made to the property to enhance its appearance.

In mid 20YY, a real estate agent was engaged to sell the property. The agent advised the best time to sell the property would be in the early months of the following year to obtain the best possible sale price.

The property was advertised for sale in MM 20YY, with an auction held on DD MM 20YY.

The property sold at auction on MM 20YY. It was a condition of the purchaser that settlement be a few months later. The property settled on DD MM 20YY.

The property did not generate assessable income between the date the deceased passed away until the date the property was sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 128-15

Reasons for decision

Question 1

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?

Summary

No. The Commissioner will not exercise his discretion under section 118-195 of the ITAA 1997 to allow an extension of time to the two-year period relating to the disposal of the property. The trustee/beneficiaries of the deceased estate are not exempt from tax on any capital gain made on the disposal of the property pursuant to section 118-195 of the ITAA 1997.

Further information about the Commissioner's discretion can be found by searching ato.gov.au for 'QC 66057'

Detailed reasoning

A capital gain or capital loss may be disregarded where a capital gains tax (CGT) 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 20 September 1985, 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 20 September 1985. After the deceased passed away, Person A continued to reside in the property in accordance with the wishes of the deceased's will that appropriate accommodation be provided by the deceased's estate.

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 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 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 client's 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 17 of 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 client's personal circumstances.

In your case, we consider as favourable factors:

•                     The deceased's estate allowing Person A to reside in the property until their death on DDMMYYYY.

•                     The multiple lockdowns (in response to the COVID-19 pandemic).

•                     It was in the terms of purchaser from the buyer that settlement be delayed.

In your case, we consider as unfavourable factors:

•                     After the lockdowns ended in late 20XX, repairs and maintenance were performed to the property to enhance the sale price of the property.

•                     After engaging the services of a real estate agent, the property was not placed on the market for several months to ensure the property market has peaked before selling.

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 CGT rules will apply to the disposal of the property.

Please note that the first element of the cost base for the property is its market value on the deceased's date of death. You will also be entitled to the 50% CGT discount in relation to the property.

Question 2

The cost base of the property, for CGT, be based on the value of the property on the date the deceased passed away?

Summary

Yes.

Detailed reasoning

Section 128-15 of the ITAA 1997 states that for a property acquired by the deceased before the introduction of CGT on 20 September 1985, the first element of the asset's cost case is the market value of the property on the day the deceased passed away. This is because the estate is taken to have acquired it on this date.