Edited version of private advice

Authorisation number: 1052394235471

Date of advice: 20 May 2025

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise his discretion under section118-195 of the Income Tax Assessment Act 1997 to allow an extension of time for the executor to dispose of the property and disregard the capital gain or capital loss made on the disposal?

Answer

No.

This ruling applies for the following period:

Year ending XX XXX 20XX.

The scheme commenced on:

XX XXX 20XX

Relevant facts and circumstances

The property is located at Address A.

The property is on less than 2 hectares.

On XX XXX 19XX the deceased and their spouse Person A acquired the property as joint tenants.

On XX XXX 20XX the deceased acquired Person A's share of the property under survivorship laws when they passed away.

The property was the main residence of the deceased for the whole period of ownership.

On XX XXX 20XX the deceased passed away.

A relation of the deceased was also residing in the property at the time of the deceased's passing.

The will named the one of the deceased's children, Person B, as executor of the estate. Person B and their 5 siblings were beneficiaries of the estate.

On XX XXX 20XX Person B had an initial consult with Solicitor A, who was engaged to assist in applying for probate on the estate.

It was at this time that is was discovered that no original copy of the deceased's will existed, only a photocopy of the will.

On XX XXX 20 Solicitor A advised that a more complex application for probate would be required because no original of the will existed.

On XX XXX 20XX Person B signed the terms of engagement for Solicitor as executor of the estate.

On XX XXX 20XX Person B provided Solicitor A with estate documentation including the death certificate.

On XX XXX 20XX Solicitor A's anticipated legal fees were paid.

On XX XXX 20XX payment for legal fees was receipted.

On XX XXX 20XX Solicitor A advised Person B that they had not previously dealt with an estate before where only a photocopy of the will is available and that they were seeking guidance on the matter.

On XX XXX 20XX Solicitor A advised that they were still waiting to hear from Bank A.

On XX XXX 20XX Solicitor A filed an initial application for Grant of Probate on the copy of the will.

On XX XXX 20XX the registrar rejected the application and requested, among other things, further affidavit evidence.

On XX XXX 20XX Solicitor A advised Person B of the additional affidavit evidence that is required from Person B, their spouse Person C, and sibling Person D regarding the existence of the will.

From XXX 20XX to XXX 20XX Person B and Person C experienced difficulties with their marital relationship and home life arising from their offer of a home to Person E, a friend of their child.

Person E's own biological family had essentially abandoned them.

Person E's presence in the home and relationships with the family created tension in the relationship between Person B and Person C.

In XXX 20XX another family was found for Person E to live with.

In XXX 20XX the relation of the deceased moved out of the property. They did not pay rent while residing in the property. The property remained vacant until sale.

On XX XXX 20XX Person B advised Solicitor A that they, Person C and Person D would provide statements to Solicitor A to assist with the preparation of affidavits as requested by the registrar.

In XXX 20XX one of the beneficiaries and siblings of Person B, Person G fell ill and was taken to hospital for a stay of 7 days.

In XXX 20XX Person G was again hospitalised, this time for 5 days.

On XX XXX 20XX Solicitor A advised Person B of the High Court costs.

On XX XXX 20XX Person B met with Solicitor A to clarify the information required for the affidavits.

On XX XXX 20XX Person B travelled overseas.

On XX XXX 20XX Person G passed away while Person B was overseas.

On XX XXX 20XX Person B returned from overseas.

On XX XXX 20XX Person B, Person C, and Person D provided Solicitor A with statements to enable preparation of the affidavits.

On XX XXX 20XX Solicitor A provided the draft affidavits to Person B.

On XX XXX 20XX Solicitor A published a notice in the 'Missing Wills' section of the Law Society's 'In Brief' publication, seeking the whereabouts of the original will.

On XX XXX 202XX Solicitor A advised Person B of this notice.

On XX XXX 20XX Person B, Person C, and Person D signed their affidavits as prepared by Solicitor A.

On XX XXX 20XX a copy of a rates notice was provided to Solicitor A.

On XX XXX 20XX Solicitor A advised that the court required a sworn statement regarding the assets and liabilities of the deceased.

On XX XXX 20XX Person B provided the sworn statement and this was filed by Solicitor A along with the affidavits and other documentation to the court.

On XX XXX 20XX the Registrar of Probates advised that additional documentation is required including written consent from all individuals who may be affected by the application.

On XX XXX 20XX Solicitor A advised Person B of the additional documentation required.

On XX XXX 20XX Person B provided Solicitor A with a copy of Person G's death certificate at their request.

On XX XXX 20XX Solicitor A contacted Person B's sibling, Person H to ask them to email their consent for the probate application to be lodged.

On XX XXX 20XX Solicitor A advised that the Registrar of Probate required Person G's executor, their spouse Person F, to provide consent and Solicitor A requested a copy of Person G' will.

On XX XXX 20XX Person F provided their written consent.

On XX XXX 20XX Solicitor A advised they had received all documentation and uploaded the amended probate application. Lodgement was confirmed.

On XX XXX 20XX the Supreme Court ordered that the copy of the will was sufficient for an application of probate to be made. This order was mistakenly taken to be a grant of probate by Solicitor A who advised Person B accordingly. Person B began negotiations on the sale of the property.

On XX XXX 20XX Solicitor A advised in writing that the court has issued a grant of Probate and that they would now close their file on the matter.

On XX XXX 20XX Person B, with the consent of the beneficiaries, sought to sell the property to Person D and engaged a conveyancer to assist.

On XX XXX 20XX Person D advised they could not proceed with the purchase of the property.

In XXX 20XX Person B engaged a real estate agency to sell the property.

On XX XXX 20XX a contract of sale was signed.

On XX XXX 20XX the conveyancer advised that probate had not yet been granted.

On XX XXX 20XX Person B engaged Law Firm A to assist with an application for probate.

On XX XXX 20XX Law Firm A filed an application for probate.

On XX XXX 20XX probate was granted.

On XX XXX 20XX settlement of the sale of the property was finalised.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Question

Will the Commissioner exercise his discretion under section118-195 of the Income Tax Assessment Act 1997 to allow an extension of time for the executor to dispose of the property and disregard the capital gain or capital loss made on the disposal?

Summary

No. The Commissioner will not exercise his discretion under section 118-195 of the ITAA 1997 and 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.

Detailed reasoning

Section 118-195 of the ITAA 1997 states that if you own a dwelling in your capacity as a beneficiary of a deceased estate, or you owned it as the trustee of a deceased estate, that you are exempt from tax on any capital gain made on the disposal of the property if:

•                     The property was acquired by the deceased before 20 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 within 2 years of the deceased's death.

The Commissioner has discretion to extend the two-year time period where the trustee or beneficiary of a deceased estate's ownership interest ends after two years from the deceased's death. Practical Compliance Guideline PCG 2019/5: The Commissioner's discretion to extend the two-year period to dispose of dwellings acquired from a deceased estate outlines the factors that the Commissioner will consider when determining whether to exercise his discretion to extend the two-year period under section 118-195 of the ITAA 1997. This discretion may be exercised in situations where:

•                     the ownership of a 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 a deceased estate delays the completion of administration of the estate

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

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

These examples are not exhaustive. They provide guidance on what factors the Commissioner would consider reasonable to exercise his discretion to extend the two-year period. Generally, the Commissioner will allow a longer period where the sale of the dwelling could not be 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. Consideration is given to whether the property was listed for sale as soon as practically possible after the resolution of any of these factors, and if the sale was completed within 12 months of the property being listed for sale.

PCG 2019/5 also outlines factors that would weigh against the Commissioner allowing a longer period. Where these factors play a role in any delay in disposing of the property, the Commissioner would not consider discretion to be appropriate:

•                     waiting for the property market to pick up before selling

•                     waiting for refurbishment of the dwelling to improve 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.

Whether the Commissioner will exercise his discretion under subsection 118-195(1) of the ITAA 1997 will depend on the facts of each case. The facts that caused the delay in disposing of the property are more important than the length of the delay.

Application to your circumstances

In your case, the original will of the deceased could not be located, only a copy. This meant there were some additional complexities to any application for probate in that the copy of the will need to be accepted by the court in the first instance.

You advise the solicitor you engaged had not previously dealt with such a matter. They did however seek guidance as to the required process and requested information from you and other relevant individuals in order to begin preparing an application to the court. This request was made on XX XXX 20XX, 8 months following the passing of the deceased.

The information requested by the solicitor was not supplied to them until XX XXX 20XX, approximately 20 months later. You advise your solicitor did not effectively advise you on what was needed to be included in the requested information. However, you did not seek clarification of that until XX XXX 20XX, some 17 months after they asked for the information.

In XXX and XXX 20XX, your sibling Person G, was ill and needed to be taken to hospital by ambulance and stayed in hospital for XXX days on both occasions.

On XX XXX 20XX you travelled overseas, returning on XX XXX 20XX. During this period your sibling Person G passed away on XX XXX 20XX, outside of the initial 2 year period from the date of the passing of the deceased.

An important consideration in our decision making is the events that took place in the two years immediately following the passing of the deceased. In your situation the first 8 months of this period was spent engaging your solicitor, providing them with relevant estate documentation, and their efforts to begin the application for probate and recognition of the copy of the will by the court. Your solicitor began that process by asking for statements from yourself, your spouse Person C, and your sibling Person D, that attested to the validity as you knew it, of the copy of the will.

For the following 11 months there was no activity towards administering the estate. You and your immediate family were experiencing some difficult personal circumstances, but it is not established that these circumstances prevented you from dealing with the requirements of the estate. You advised these personal circumstances were resolved in XXX 20XX.

An additional 9 months elapsed until the requested information was provided to your solicitor. There was in total, a period of 20 months from the date of your solicitor's request until the information was provided on XX XXX 20XX. Without the requested information having been provided, your solicitor would have been unable to progress the application for probate and recognition of the copy of the will.

Having considered the relevant facts, we will not apply the discretion under subsection 118- 195(1) to allow an extension to the two-year time limit. It is the Commissioner's view that the delay in disposing of the property was due to an extended period of inactivity in terms of administration of the estate, and that this delay was not outside of your control.

The Commissioner has not exercised the discretion to extend the two-year period to dispose of a dwelling under section 118-195. Therefore, any capital gain made on the property from the date the deceased passed away until the property is disposed of will be taxable. That is, the first element of your cost base for the property is its market value on the deceased's date of death.