Edited version of private advice

Authorisation Number: 1052358970453

Date of advice: 13 March 2025

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 property and disregard the capital gain or capital loss you made on the disposal?

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 passed away on DD MM YY.

The deceased purchased a property with their late spouse on DD MM YY. The deceased acquired their spouse's interest in the property through right of survivorship on DD MM YY.

The property is less than 2 hectares.

The property was the deceased's main residence at the time of their death. The property was never used to produce income.

Probate was granted on DD MM YY.

The will appoints XXXX as executor and trustee of the testamentary trust created under the will.

The will determines that XXXX will apply the income and corpus from the estate for the maintenance and benefit of the beneficiary for their lifetime or until they regain the ability to manage their own affairs. The will directs that XXXX obtain annual, medical assessments as to the capacity of the beneficiary and the requirement for ongoing provision of their guardianship.

The deceased's child is the primary beneficiary of the estate. Should the child pass away, the estate will pass to a residual beneficiary, the deceased's XXXX and beneficiary's cousin.

The beneficiary has an intellectual disability and has had a chronic mental health condition since childhood.

After the death of the deceased, their child remained living at the property, assisted by a family relative. XXXX made the decision to allow the beneficiary to remain living at the property.

In XX 20XX the XXXX was appointed by the XXXX as legal guardian of the beneficiary.

The deceased's child became increasingly unable to manage living at the property and on the advice of the XXXX they were move into a supported residential care facility in XX 20XX.

In XX 20XX XXXX engaged financial planners for advice and recommendations for the deceased's property.

The trustee and administrator made the decision to sell the property to sustain the funds of the estate applied for the beneficiary's ongoing residential care. In XX 20XX the remainder beneficiary approved the sale of the deceased's property. The property remained vacant until its sale.

In XX 20XX XXXX arranged a professional property valuation.

In XX 20XX relatives of the deceased removed personal items from the property.

The property was professional cleaned in XX 20XX.

The property was listed for sale on DD MM YY and a contract of sale was signed on DD MM YY, with settlement occurring on DD MM YY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Section 118-195 of the ITAA 1997 provides a capital gains tax (CGT) exemption to beneficiaries and trustees where a CGT event happened to a dwelling they acquired from a deceased estate if:

•                     the property was acquired by the deceased before September 1985, or

•                     the property was acquired by the deceased on or after 20 September 1985 and the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income,

and

•                     your ownership interest ends with two years of the deceased's death or within a longer period allowed by the Commissioner, or

•                     the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of:

-                    the spouse of the deceased immediately be death, or

-                    an individual who had a right to occupy the dwelling under the deceased's Will; or

-                    the individual to whom the ownership interest is transferred as a beneficiary and is then sold by that individual.

Commissioner's discretion

Practical Compliance Guideline PCG 2019/5: The Commissioner's discretion to extend the 2-year period to dispose of dwellings acquired from a deceased estate (PCG 2019/5) outlines the factors that the Commissioner will consider when determining whether or not to exercise the discretion to extend the two year period under section 118-195 of the ITAA 1997.

Generally, the Commissioner will allow a longer period where the sale of the dwelling was delayed due to reasons beyond your control.

According to the PCG, factors that would weigh in favour of the Commissioner allowing a longer period include:

•                     the ownership of the dwelling, or the Will, is challenged

•                     a life or other equitable interest given in the will delays the disposal of the dwelling

•                     the complexity of the deceased estate delays the completion of the administration of the estate

•                     settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of the trustee's/beneficiary's control

•                     restrictions on real estate activities imposed by a government authority in response to the COVID-19 pandemic.

Other factors that may be relevant to the exercise of the Commissioner's discretion include, but are not limited to:

•                     the sensitivity of the trustee's/beneficiary's personal circumstances and/or of other surviving relatives of the deceased

•                     the degree of difficulty locating all beneficiaries required to prove the Will

•                     any period the dwelling was used to produce assessable income, and

•                     the length of time the trustee/beneficiary held ownership interest in the dwelling.

Factors that would weigh against the Commissioner allowing a longer period include:

•                     waiting for the property market to pick up before selling the dwelling

•                     delay due to refurbishment of the house to improve the sale price

•                     inconvenience on the part of the trustee or beneficiary to organise the sale of the house, or

•                     unexplained periods of inactivity by the executor in attending to the administration of the estate.

Paragraph 14 of PCG 2019/5 explains we weigh up all of the factors (both favourable and adverse). In doing that, the Commissioner considers the factors within the whole of the period between the date the deceased passed away and completion of the sale of the dwelling.

Although it was understandable why the choice was made to allow the beneficiary to remain living at the property, that individual did not have a right to occupy the property under the deceased's will. The decision to allow the beneficiary to reside in the dwelling was a matter of choice within the control of the trustee.

Further, the sale of the property was not completed until nearly three years after the beneficiary moved out of it.

The estate was directed to apply the income or corpus of the trust for the maintenance and support of the deceased's child. You had two years from the date of the deceased's death to dispose of the dwelling.

The delay in selling the dwelling was not caused by any of the circumstances described as favourable factors, and therefore, you cannot rely on the safe harbour.

In your case, we acknowledge the deceased's will specifies that the property (corpus) of the estate was to be held on trust for the beneficiary's lifetime and applied for their maintenance or until the beneficiary regained mental capacity to manage their own affairs.

Nevertheless, you do not satisfy the conditions to be eligible for a full main residence exemption under section 118-195 of the ITAA 1997. The capital gain or loss on disposal of your ownership interest in the property cannot be disregarded in the income year when the CGT event occurred.

There was no challenge to the ownership of the property or the deceased's will.

There were significant periods of inactivity after the beneficiary moved out of the property.

There were no unforeseen or serious personal circumstances arising such that a trustee was unable to attend to the estate's administration from the time the beneficiary moved to permanent residential care.

There was no unexpected delay for settlement of a contract of sale over the property.

Having considered the relevant facts, the Commissioner will not apply the discretion under section 118-195 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. 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. You are also entitled to the 50% CGT discount in relation to the property.