Edited version of private advice

Authorisation Number: 1052380490219

Date of advice: 3 April 2025

Ruling

Subject: CGT - deceased estate

Question 1

Did table item 3 of subsection 128-15(4) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to modify the first element of the cost base of Property A in the hands of the executor of the estate of Person A (Estate)?

Answer 1

No.

Question 2

Is the Estate entitled to a partial exemption under subsection 118-200(1) of the ITAA 1997 with respect to the disposal of Property A?

Answer 2

Yes.

Question 3

For the purposes of calculating the Estate's capital gain using the formula at subsection 118-200(2) of the ITAA 1997 with respect to the disposal of Property A, will the days in the period from 19XX to 20XX be included as 'non-main residence days'?

Answer 3

No.

Question 4

Will the Commissioner exercise the discretion under subparagraph 118-200(3)(b)(ii) of the ITAA 1997 to extend the 2-year time period by which the Estate's ownership interest in Property A could end?

Answer 4

Yes.

This ruling applies for the following period:

Income year ended 30 June 2024

Relevant facts and circumstances

Property B was purchased by Person A in the 19XXs and (from settlement) became Person A's family's main residence.

Property B is adjacent to Property A, where Person A's parents lived at that time (in the 19XXs and throughout the 19XXs).

Person A acquired Property A from their parents in 19XX and from that time assumed responsibility for all landholding costs (including utility bills, rates, repairs, maintenance and renovations) relating to Properties A and B.

Person A's Parent C passed away in 19XX.

In 19XX Person A moved into Property A to care for their Parent D, and in 19XX Person A's parent D moved into an aged care facility.

From 19XX (once Person A's parent D moved out of Property A) Person A and their spouse, Person B, treated Property A and Property B as a single integrated residence.

Person A used a room in Property A as an office for their business and would store stock for that business in sheds located on Properties A and B. During the income years ended 30 June 19XX to 30 June 20XX, Person A received rental income from associated entities for the use of the office and the sheds at Property A.

In 20XX, Person A and Person B ceased to use Properties A and B as a single residence and lived exclusively in Property B.

In late 20XX, Person A's Child 1 moved into Property A to provide support in relation to Person A's declining health. No written lease agreement was entered into between Person A and their child in relation to Property A. Person A's Child 1 did not pay rent, nor did Person A recoup any expenses from Child 1 in relation to Property A.

Person A was formally diagnosed with an illness in 20XX.

Person A continued to reside solely at Property B from 20XX until they were hospitalised in 20XX. Person A then moved directly from hospital into an aged care facility.

Person A passed away in the aged care facility in August 20XX.

Person B commenced Family Court proceedings against Person A in 2020, prior to Person A's death (Family Law Dispute). The Family Law Dispute was finalised subsequent to Person A's death, resulting in Property B being transferred from the Estate to Person B in XXX 20XX in accordance with a Family Court order.

Person A's last Will was dated in 20XX (20XX Will). In XXX 20XX, Person A's Child 1 (appointed executor along with their sibling Child 2 under the 20XX Will) sought probate of the 20XX Will.

In XXX 20XX, Person A's other child Child 3 objected to the 20XX Will being admitted to probate on the grounds that Person A lacked testamentary capacity at the time the 20XX Will was executed (due to their medical diagnosis) and sought Person A's penultimate Will dated in January 20XX (under which Child 3 was appointed executor) to be admitted to probate (Estate Dispute).

Following protracted negotiations and mediation, the parties settled the Estate Dispute in XXX 20CC by Terms of Settlement between the 3 siblings.

Subsequent to the completion of specific conditions contained in the Terms of Settlement, Child 2 sought Probate of the 20XX Will in XXX 20XX. Child 2 was granted probate as sole executor of the Estate on XX XXX 20XX.

Rectification works to prepare Property A for sale were carried out during XXX and XXX 20XX. These works included the removal of several trees on the boundary between Property A and Property B to allow construction of the dividing fence, the construction of the dividing fence, the demolition and replacement of the rear fence, the demolition and removal of a fibro shed in the backyard, cleaning, painting and gardening. But for these works, no major adjustments, alterations or renovations were made to Property A in preparation for its sale.

Property A was sold by the executor under a contract of sale entered into on X XXX 20XX. The contract of sale was settled on X XXX 20XX.

Property A has not been used for income producing purposes since the year ended 30 June 2018.

Person A was not an 'excluded foreign resident' at the time of their death or at any point in their life. They and the executor were residents of Australia for tax purposes at all relevant times.

Since the acquisition of Property B in the 19XXs, Person A did not treat any dwelling not referred to in this ruling as their main residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 118-115

Income Tax Assessment Act 1997 subsection 118-130(3)

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 subsection 118-195(2)

Income Tax Assessment Act 1997 section 118-200

Income Tax Assessment Act 1997 subsection 118-200(1)

Income Tax Assessment Act 1997 subsection 118-200(2)

Income Tax Assessment Act 1997 subsection 118-200(3)

Income Tax Assessment Act 1997 subparagraph 118-200(3)(b)(ii)

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 subsection 128-15(2)

Income Tax Assessment Act 1997 subsection 128-15(4)

Reasons for decision

All subsequent legislative references are to the ITAA 1997.

Question 1

Summary

Table item 3 of subsection 128-15(4) did not apply to modify the first element of the cost base of Property A in the hands of the executor of the Estate as Property A was not Person A's main residence just before they died.

Detailed reasoning

Division 128 sets out the CGT consequences that arise when a CGT asset devolves to a deceased's legal personal representative (including an executor of a deceased estate).

The executor of the Estate is taken to have acquired Property A in XXX 20XX (the date of Person A's death) pursuant to subsection 128-15(2).

The table in subsection 128-15(4) sets out modifications to the cost base and reduced cost base of the CGT asset in the hands of the legal personal representative.

For a dwelling that was the deceased's main residence just before they died, table item 3 of subsection 128-15(4) states that the first element of the asset's cost base and reduced cost base is the market value of the dwelling on the day the deceased died if:

•                     the dwelling was not being used for the purpose of producing assessable income just before the deceased died; and

•                     the deceased was not than an excluded foreign resident.

Therefore, table item 3 of subsection 128-15(4) would have applied to modify the first element of the cost base of Property A in the hands of the executor of the Estate - for example. by making it the market value of Property A as at XXX 20XX - if Property A (a dwelling within the meaning of that term in section 118-115) was Person A's main residence just before they died.

Section 118-145 applies to enable you (an individual) to choose to continue to treat a dwelling that ceases to be your main residence as your main residence.

Based on the relevant facts and circumstances on which this ruling is made, Person A's main residence was:

•                     Property B (as a single unit of accommodation) from the time of its acquisition in the 1970s until 19XX;

•                     Property A (as a single unit of accommodation) from the time they moved into it in 19XX to care for Parent D until 19XX;

•                     Properties A and B (one dwelling comprised of 2 separate units of accommodation) from 19XX (following Parent D's death) until 20XX (when they and their spouse ceased using both properties as a single residence); and

•                     Property B (as a single unit of accommodation) from 20XX.

Section 118-145 does not apply to enable the executor of the Estate to choose to continue to treat Property A as Person A's main residence such that, for the purposes of table item 3 of subsection 128-15(4), it was their main residence just before they died.

This is because Property A, as a single unit of accommodation, was not the dwelling that was, and ceased to be, Person A 's main residence in 20XX. The dwelling that ceased being Person A's main residence in 20XX was that comprised of the 2 units of accommodation, Property A and Property B.

As section 118-145 does not apply to enable Property A to continue to be treated as Person A's main residence until just before their death, table item 3 of subsection 128-15(4) cannot apply to modify the first element of the cost base of Property A.

Questions 2 - 4

Summary

The Estate is entitled to a partial exemption under subsection 118-200(1) with respect to the disposal of Property A and, for the purposes of calculating the Estate's capital gain using the formula at subsection 118-200(2) with respect to that disposal, the days in the period from 19XX to 20XX will not be included as 'non-main residence days'.

The Commissioner will exercise the discretion under subparagraph 118-200(3)(b)(ii) to extend the 2-year time period by which the Estate's ownership interest in Property A could end to X XXX 20XX.

Detailed reasoning

CGT event A1 under section 104-10 happens if an entity disposes of a CGT asset. A CGT asset includes an interest in real property (subsection 108-5).

Section 118-195 disregards any capital gain or loss made from a CGT event listed in subsection 118-195(2) (including CGT event A1) that happens in relation to a dwelling if:

•                     you owned it as the trustee of a deceased estate;

•                     the deceased acquired the ownership interest on or after 20 September 1985 and the dwelling was the deceased's main residence just before their death and was not then being used for the purpose of producing income;

•                     your ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner; and

•                     the deceased was not an excluded foreign resident just before their death.

Section 118-200 allows a partial exemption of any capital gain or loss made from a CGT event listed in subsection 118-195(2) that happens in relation to a dwelling if you owned it as the trustee of a deceased estate and section 118-195 does not apply.

The capital gain or capital loss for these purposes is calculated using the following formula at subsection 118-200(2):

>

Where:

CG or CL amount is the capital gain or capital loss you would have made from the CGT event apart from this Subdivision.

non-main residence days is the sum of:

(a) if the deceased acquired the ownership interest on or after 20 September 1985 - the number of days in the deceased's ownership period when the dwelling was not the deceased's main residence; and

(b) the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of an individual referred to in item 2, column 3 of the table in section 118-195.

total days is:

(b) if the deceased acquired the ownership interest on or after [20 September 1985] - the number of days in the period from the acquisition of the dwelling by the deceased until your ownership interest ends.

Subsection 118-200(3) allows this formula to be adjusted by ignoring any 'non-main residence days' and 'total days' in the period from the deceased's death until your ownership interest ended if:

•                     the deceased acquired the ownership interest on or after 20 September 1985; and

•                     your ownership interest ends within 2 years of the deceased's death, or a longer period allowed by the Commissioner;

•                     you get a more favourable result by doing so; and

•                     the deceased was not an excluded foreign resident just before their death.

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 (PCG 2019/5) sets out the factors which the Commissioner gives regard to in considering whether or not to grant an extension of time.

Paragraph 3 of PCG 2019/5 states:

Generally, [the Commissioner] will allow a longer period where 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.

Paragraph 12 of PCG 2019/5, sets out the circumstances favouring a longer period by which the taxpayer's ownership interest in the dwelling ends. They are:

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

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

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

•                     settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of your control, or

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

The Commissioner may also consider other factors relevant to the exercise of the discretion, as listed in paragraph 17 of PCG 2019/5 to include:

•                     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.

Conversely, paragraph 13 of PCG 2019/5 sets out the circumstances that the Commissioner considers cannot be material to the delays in the disposal of the taxpayer's ownership interest. They are:

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

•                     waiting for refurbishment of the dwelling to improve the sale price

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

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

Application to your circumstances

CGT event A1 happened to the Estate upon its entry into the contract of sale in respect of Property A in XXX 20XX.

The Estate is not entitled to disregard its capital gain from that CGT event pursuant to section 118-195 on the basis that Property A was not Person A's main residence just before their death in XXX 20XX (as concluded in response to question 1 of this ruling).

Section 118-200 will, however, allow a partial exemption of the Estate's capital gain from the disposal of Property A (on the basis that it owned Property A as the trustee of a deceased estate and section 118-195 does not apply).

For the purposes of calculating the Estate's capital gain using the formula at subsection 118-200(2) with respect to the disposal of Property A, the 'non-main residence days' will not include the days in the period from 19XX to 19XX (when Person A moved into, and resided in, Property A as a single unit of accommodation to care for Parent D) and the days in the period from 19XX until 20XX (when Person A and Person B resided at both Properties A and B as a single integrated residence).

The Estate's legal ownership, and therefore ownership interest, in Property A ended in XXX 20XX (subsection 118-130(3)), more than 2 years after the death of Person A (in XXX 20XX), thereby exceeding the statutory limit in subsection 118-200(3).

Consequently, subsection 118-200(3) does not apply to allow the formula in subsection 118-200(2) to be adjusted by ignoring any 'non-main residence days' and 'total days' in the period from Person A's death until the Estate's ownership interest ended, unless the Commissioner extends the time limit.

In this regard, the Commissioner considers it appropriate to exercise the discretion under subsection 118-200(3) to extend the time limit by which the interest in Property A owned by the Estate ended until the time at which that ownership interest ended, i.e. X XXX 20XX.

The basis for this decision includes the following:

•                     the delays caused by Family Law Dispute, resolution of which was reached XX months after Person A's death;

•                     Mr C's challenge of the 2019 Will, resolution of which was reached more than XX months after Person A's death;

•                     Property A was listed for sale within a reasonable time after probate was granted;

•                     the sale of Property A was completed (settled) shortly after being listed; and

•                     none of the factors in paragraph 13 of PCG 2019/5 were relevant to the delay in disposing of Property A.

As such, the Estate may adjust the formula in subsection 118-200(2) by ignoring any 'non-main residence days' and 'total days' in the period from Person A 's death until the Estate's ownership interest ended.