Edited version of private advice

Authorisation Number: 1052389678159

Date of advice: 29 April 2025

Ruling

Subject: CGT - deceased estate - 2 year discretion

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 ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The deceased acquired the property at XX XXXX, XX, XX in MM 19YY. The property was their main residence and never used to produce income.

The deceased was widowed.

The property is less than 2 hectares.

The deceased passed away on DD MM 20YY.

Probate was granted on DD MM 20YY.

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 well-being of the deceased's child for their lifetime, as the primary beneficiary (beneficiary).

On the beneficiary's death, the estate will pass to the remainder beneficiaries, the deceased's grandchildren, once they attain 25 years of age.

At the time of the deceased's death, the beneficiary was living at the property. The beneficiary had a chronic health condition and was reluctant to leave the property. The executor made the decision to allow the beneficiary to continue to reside at the property after their parent's death at the beneficiary's request. The beneficiary did not own any property throughout their lifetime.

On DD MM 20YY the beneficiary entered into an agreement under a charitable program to provide back-yard studio accommodation at the property as a carer for a young person at risk of homelessness. The studio arrangement was approved by the executor as the registered proprietor.

A 2-bedroom studio was provided to the beneficiary's child (remainder beneficiary A) and their newborn child. They were 20 years of age at the time. They did not pay any form of board or rent for the accommodation.

The studios are delivered as a flat-pack kit and assembled on the property. Removal of a studio is done within 3 months from a 60-day notification of the removal request.

On DD MM 20YY, the beneficiary passed away.

On DD MM 20YY, remainder beneficiary A contacted the executor requesting consideration of transfer of the property to the remainder beneficiaries and to report a fallen boundary fence.

On DD MM 20YY the executor contacted the remainder beneficiaries with finalisation documents and sought instructions regarding the trust property.

On DD MM 20YY the executor again contacted the remainder beneficiaries seeking instructions regarding the trust property. The executor was advised at that time that both remainder beneficiaries were living at the property, but confirmed they wished the property to be sold. Remainder beneficiary A also advised they had had a second child. Remainder beneficiary A advised that contact would be made with the charitable organisation to request the removal of the studio.

Written confirmation from the remainder beneficiaries was received by the executor from remainder beneficiary B on DD MM 20YY and remainder beneficiary A on DD MM 20YY.

On DD MM 20YY the executor sent an email to the remainder beneficiaries requesting an update on the studio removal.

On DD MM 20YY remainder beneficiary A advised they had requested the charitable organisation remove the studio accommodation at the property.

Remainder beneficiary A moved out of the property on DD MM 20YY and confirmed the studio removal was booked for DD MM 20YY. Remainder beneficiary B remained at the property until its sale.

On DD MM 20YY remainder beneficiary A advised that the studio had been removed from the property and the property was being cleared and cleaned in preparation for its sale.

During MM and MM 2024 the executor dealt with the funding and repair of the fallen boundary fence.

On DD MM 20YY remainder beneficiary B provided written confirmation that the property was ready for sale and that they would remain living at the property until its sale.

In MM 20YY, the executor obtained a property valuation and engaged a real estate agent.

On DD MM 20YY a real estate agent was appointed and the property listed for auction on DD MM 20YY. The property was passed in with no bids.

The property was sold on DD MM 20YY with settlement occurring on DD MM 20YY.

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 before their 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 two years after the death of the beneficiary who was living at the property.

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.

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, until MM 20YY, to dispose of the dwelling.

In your case, we acknowledge the deceased's will specifies that the income and corpus of the estate was to be held on trust for the beneficiary's lifetime and applied for their maintenance. However, the deceased's will did not provide a right to occupy the dwelling. The decision to allow the beneficiary to continue to reside at the property after the deceased's passing was made by the executor and is understandable allowing for sensitivity of the beneficiary's personal circumstances

Nevertheless, the additional time taken to dispose of the dwelling beyond that beneficiary's passing is a factor that weighs against the Commissioner allowing a longer period.

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

There were no unforeseen or serious personal circumstances arising such that the trustee was unable to attend to the estate's administration from the time the beneficiary passed away.

There were significant periods of inactivity after the beneficiary passed away.

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

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 ended 30 June 20YY when the CGT event occurred

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.