Edited version of private advice

Authorisation Number: 1052344835809

Date of advice: 18 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 of the property?

Answer

Yes, but the area must be less than 2 hectares and was not then being used for the purposes of producing assessable income.

Question 2

Will the Commissioner exercise his discretion under subsection 152-80(3) of the ITAA 1997 to extend the 2-year time limit in sub-section 152-80(1)(d) of the ITAA 1997 to DD MM YY for the deceased legal personal representative to dispose of the post-CGT interests in the properties?

Answer

Yes. Having considered the circumstances, the Commissioner will exercise discretion under subsection 152-80(3) to extend the 2-year time limit in paragraph 152-80(1)(d) to DD MM YY.

Question 3

Will the Commissioner exercise his discretion under subsection 152-80(3) of the ITAA 1997 to extend the 2-year time limit in sub-section 152-80(1)(d) of the ITAA 1997 to DD MM YY for the deceased legal personal representative to dispose of the 50% pre-CGT interest in the property?

Answer

No. The legal personal representative cannot access the small business concessions under section 152-80 of the ITAA 1997.

This ruling applies for the following periods:

Year ended 30 June 20YY

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The deceased passed away on xx xx 20xx.

The Deceased held eight parcels of land in ten certificates of title in their own name at the time of their death.

The properties form part of the deceased's estate.

All properties were post-CGT assets in the hands of the deceased with the exception of a 50% interest in the property 9, which was acquired by the deceased pre-CGT.

Main residence

One of the properties was acquired by the deceased with their spouse on xx xx 20xx.

The deceased's ownership interest in the property was one third, and their spouse's interest was two thirds. On the death of the spouse, their two thirds interest passed to the deceased in accordance with their will on xx xx 20xx.

The property is greater than 2 hectares.

The deceased resided at the property and the dwelling was the deceased's main residence.

The dwelling was never used to produce income. However, the land surrounding the dwelling was income producing.

The dwelling was left vacant after their death.

Other properties

Farms were operated through the xx xx xx. The deceased and their spouse were the directors of the trustee company.

The deceased was the sole director of the trustee company from xx xx 20xx, following their spouse's death. The deceased continued to operate the farms until their death.

Probate was granted on xx xx 20xx.

The deceased's will appoints their accountants, their solicitor and their child as executors.

The deceased's will provides that all assets were to be held in a testamentary trust, known as the xx xx xx xx, with the executors as trustees, for equal benefit of the income for the deceased's children until xx xx 20xx. The children were to manage the farms together until 20xx and share any profits equally.

After grant of probate, the beneficiaries disagreed regarding the management of the estate with a majority expressing a desire for sale of the lands and distribution of the proceeds.

Between xx 20xx and xx 20xx the executors each obtained independent valuations of the properties.

Deeds of family arrangement were drafted, but without consensus between the beneficiaries.

In addition, part of the land on 5 properties was being used as farming operations by external parties under a verbal agreement with the deceased.

The external parties claimed to have a right to continue to use the land until 20xx.

In xx 20xx the executors briefed a barrister to provide advice on the use of the land.

On xx xx 20xx the executors issued a Notice to Vacate to the leasehold proprietary interest with regard to the parcels of land.

The external parties did not vacate. The external parties lodged a caveat over those parts of the land.

In xx 20xx the external parties initiated legal action against the estate.

The claims were settled by the executors in a deed of settlement executed on xx xx 20xx in full settlement of all claim or rights against the estate. The agreement provided an extension of time to the external parties until xx xx 20xx to provide vacant possession; allowing for consideration of the funds they had invested to prepare for cropping and harvest.

On xx xx 20xx all properties were offered for sale by way of public expression of interest.

Five of the properties were sold on xx xx 20xx to children of the deceased as agreed.

The remaining properties were sold to external parties.

On xx xx 20xx a deed of family arrangement was agreed between all beneficiaries that the family trust and the testamentary trust be wound up and the proceeds be distributed in equal shares to the beneficiaries.

A contract of sale for the deceased's main residence was entered on xx xx 20xx, with settlement occurring on xx xx 20xx.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 Section 118-115

Income Tax Assessment Act 1997 Section 118-120

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-80

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 of the property?

Summary

Yes, but the area must be less than 2 hectares and was not then being used for the purposes of producing assessable income.

Detailed reasoning

Section 118-195 of the ITAA 1997 disregards capital gains and capital losses made from certain CGT events that happen in relation to a dwelling that was a deceased person's main residence and was not being used to produce assessable income just before they died or was acquired by the deceased before 20 September 1985.

Any capital gain or loss on a dwelling acquired by an individual as a beneficiary of a deceased estate or by a trustee of a deceased estate is fully exempt if:

a)            the dwelling was the deceased's main residence just before the deceased's death and was not then being used to produced assessable income, or it was a pre-CGT property of the deceased; and

b)            the dwelling was disposed of within two years of the deceased's death, or it was, from the time of the deceased's death until the disposal, the main residence of:

•                    the deceased's spouse;

•                    an individual who had a right to occupy the dwelling under the will; or

•                    a beneficiary.

The Commissioner has the discretion to extend the 2-year period.

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

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

We will allow a longer period as 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. In your case, complexities of the deceased estate delayed the completion of administration of the estate.

Question 2

Will the Commissioner exercise his discretion under subsection 152-80(3) of the ITAA 1997 to extend the 2-year time limit in sub-section 152-80(1)(d) of the ITAA 1997 to xx xx 20xx for the deceased legal personal representative to dispose of properties 1, 2, 4, 5, 6, 7, 8 and 10?

Summary

Having considered the circumstances, the Commissioner will exercise discretion under subsection 152-80(3) to extend the 2-year time limit in paragraph 152-80(1)(d) to xx xx 20xx.

Detailed reasoning

Section 152-80 of the ITAA 1997 allows the legal personal representative established by the will of a deceased individual to reduce or disregard a capital gain under Division 152 of the ITAA 1997 where:

•                     A CGT asset forms part of the estate of the deceased individual.

•                     The asset devolves to that legal personal representative.

•                     The deceased individual would have been entitled to reduce or disregard a capital gain under Division 152 if a CGT event had happened in relation to the CGT asset immediately before their death; and

•                     A CGT event happens in relation to the asset within 2 years of the individual's death.

The properties 1, 2, 4, 5, 6, 7, 8, 9 and 10 form part of the deceased individual's estate.

The deceased individual would have been entitled to reduce or disregard the capital gain under Division 152 of the ITAA 1997 if a CGT event happened in relation to the CGT asset immediately before their death.

The CGT event did not happen within 2 years of the individuals death.

Subsection 152-80(3) of the ITAA 1997 allows the Commissioner to exercise discretion and extend the 2-year time limit in paragraph 152-80(1)(d) of the ITAA 1997.

The children were divided after the grant of probate and could not agree on a deed of family arrangement to deal with the properties 1, 2, 4, 5, 6, 7, 8, 9 and 10.

The dispute between the children caused delays in the selling of the properties.

Furthermore, the deceased had verbally agreed to let external parties use part of the land at properties 2, 3, 5, 7 and 8. There was a dispute with the external parties who refused to vacate the land. A caveat was lodged by the external parties and legal action was initiated in xx 20xx. This caused additional delay in the sale of the properties.

After mediation in xx 20xx the parties were able to reach an agreement and a deed of settlement was entered into directing the external parties to vacate the land by xx xx 20xx.

The properties were sold between xx xx 20xx and xx xx 20xx.

In the circumstances, the period of extension you have requested is considered fair and reasonable. The Commissioner will exercise discretion under subsection 152-80(3) of the ITAA 1997 to extend the time limit in paragraph 152-80(1)(d) of the ITAA 1997 to xx xx 20xx.

Question 3

Will the Commissioner exercise discretion under subsection 152-80(3) of the ITAA 1997 to extend the 2-year time limit in sub-section 152-80(1)(d) of the ITAA 1997 to xx xx 20xx for the deceased legal personal representative to dispose of the pre-CGT property 9?

Summary

The legal personal representative cannot access the small business concessions under section 152-80 of the ITAA 1997.

Detailed reasoning

Section 152-80 of the ITAA 1997 allows the trustee established by the will of a deceased individual to reduce or disregard a capital gain under Division 152 of the ITAA 1997 where:

•                     A CGT asset forms part of the estate of the deceased individual;

•                     The asset devolves to that trustee;

•                     The deceased individual would have been entitled to reduce or disregard a capital gain under Division 152 if a CGT event had happened in relation to the CGT asset immediately before their death; and

•                     A CGT event happens in relation to the asset within 2 years of the individual's death.

Under paragraph 152-10(1)(b) of the ITAA 1997 for a capital gain to be reduced or disregarded under Division 152 the event must have resulted in a gain.

A capital gain or loss you make is disregarded under paragraph 104-10(5)(a) of the ITAA 1997 if you acquired the asset before 20 September 1985.

50% of property 9 is a pre-CGT asset as it was acquired prior to 20 September 1985.

As it is a pre-CGT asset the conditions of section 152-80 of the ITAA 1997 would not be satisfied as the deceased would not have been entitled to reduce or disregard a capital gain under Division 152 if the CGT event happened immediately before the deceased death because the capital gain on a pre-CGT asset would have been disregarded. Therefore, no capital gain would result from the CGT event as required under paragraph 152-10(1)(b) of the ITAA 1997.

This means that the legal personal representative cannot access the small business concessions under section 152-80 of the ITAA 1997.