Edited version of private advice

Authorisation Number: 7910150322000

Date of advice: 18 May 2022

Ruling

Subject: CGT - deceased estate

Question

Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to the two-year period until settlement?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

XX March 2018

Relevant facts and circumstances

The property is not a pre-CGT asset.

The property does not exceed 2 hectares.

The property was lived in and owned by XX.

The deceased passed away on XX XX 20XX.

The property was also the main residence for you and your children.

You had lived with the deceased for XX years.

Probate was granted on X XX 20XX.

In accordance with the will, the property was transferred to you and your sibling late 20XX.

The 4 beneficiaries agreed that you could remain in the property for a further 2 years.

This was to minimise disruption for your children and allow time to arrange accommodation going forward.

You ceased living in the property early 20XX.

The property was sold by you and your sibling as executors of the estate.

The property was settled on XX XX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Detailed reasoning

Subsection 118-195 (1) of the ITAA 1997 disregards a capital gain or loss that is made from a CGT event regarding a dwelling or your ownership interest if:

•         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 death (except a spouse who was living permanently separately and apart from the deceased); or

­    An individual who had a right to occupy the dwelling under the deceased's will; or

­    If the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary -- that individual.

None of these considerations have been met in the circumstances. There is no spouse to claim the house as main residence and no individual who had the right to occupy under the deceased's will. Furthermore, the property was sold by you and your sister (the executors of the estate) and not by a beneficiary who has had ownership interest passed onto them.

The following 2 ATO Interpretative Decision excerpts provide legislation, again, commenting on the validity of an individual's right to occupy and how it effects the sale of the property:

•         ATO Interpretative Decision ATO ID 2003/109 Capital Gains Tax: deceased estate - main residence exemption. An individual would be considered to occupy a dwelling under the deceased's will if it was in accordance with the terms of the will. This would also be the case if it was in pursuance of the will or under the authority of the will (see Evans v. Friemann (1981) 53 FLR 229 at 238)

•         ATO Interpretative Decision ATO ID 2004/882 Capital Gains Tax: main residence exemption - deceased estate - right to occupy dwelling for a limited period. As the individual did not have the right to occupy the dwelling for the entire period commencing from the date of the deceased's death and ending when the trustees ceased to own the property, the trustees are not entitled to a full main residence exemption under subsection 118-195 (1) of the ITAA 1997.

Safe Harbour

If your circumstances satisfy the conditions listed in paragraph 11 of Practical Compliance Guide PCG 2019/5 - The Commissioner's discretion to extend the two year period to dispose of dwellings acquired from a deceased estate, you can manage your tax affairs as if we had allowed you a period longer than 2 years (safe harbour). In PCG 2019/5, the factors we consider when deciding whether the discretion should be exercised, and the safe harbour compliance approach are outlined. The following paragraph (11) explains how to determine if you qualify for safe harbour. Paragraphs 12 and 13 are included as they contain circumstances that are provide context to paragraph 11 to qualify for safe harbour:

11.   To qualify for the safe harbour, you must satisfy all of the following conditions:

•         During the first two years after the deceased's death, more than 12 months was spent addressing one or more of the circumstances described in paragraph 12 of this guideline

•         The dwelling was listed for sale as soon as practically possible after those circumstances were resolved (and the sale was actively managed to completion)

•         The sale complete (settled) within 12 months of the dwelling being listed for sale

•         If any of the circumstances described in paragraph 13 of this guideline were applicable, they were immaterial to the delay in disposing of your interest, and

•         The longer period for which you would otherwise need the discretion to be exercised is no more than 18 months.

Circumstances that took more than 12 months to resolve

12.   One or more of the following circumstances must have taken more than 12 months to address

•         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 administration of the estate, or

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

Circumstances that cannot be material to delays in disposal

13.   In order to qualify for the safe harbour, none of the following circumstances can have been material to the delay in disposing of your interest:

•         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.

Not all the qualifiers in paragraph 11 are satisfied meaning you do not qualify for safe harbour and the contents of paragraphs 12 and 13 are irrelevant to your circumstances. In PCG 2019/5, example 2 is similar to your situation and provides more practical reasoning as to why safe harbour is not applied:

Example 2 - No Safe Harbour - Family Member Residing in Dwelling

25.             Ms Evans lived with Bevan (her adult son and full-time carer) in her main residence until she died on 1 September 2013. The dwelling was acquired after 20 September 1985 and was not being used to produce assessable income

26.             On the basis the dwelling would still be sold and settled within a two year period, the trustee of the estate allowed Bevan to continue to live in the dwelling until he found full-time employment. Bevan was not given any right to occupy the house under Ms Evans' will.

27.             In June 2016, Bevan obtained full-time employment and moved out of the dwelling. The trustee then sold the dwelling.

28.             Because the delay in selling the dwelling was not caused by any of the circumstances described as favourable factors, the trustee cannot rely on the safe harbour. The decision to allow Bevan to reside in the dwelling was a matter of choice within the control of the trustee.

Exercise of the discretion

In considering whether to extend the two year period, we weigh up all of the factors (both favourable and adverse) having regard to the facts and circumstances of the case.

Factors that would weigh in favour of the Commissioner allowing a longer period include those listed in paragraph 12 of the PCG. The absence of some or all those favourable factors does not necessarily preclude us from allowing a longer period.

Factors that would weigh against the Commissioner allowing a longer period include those listed in paragraph 13 of the PCG.

Other factors that may be relevant to the exercise of the Commissioner's discretion (but are not relevant for the safe harbour) include but are not limited to:

•         the sensitivity of your personal circumstances and/or 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.

How much weight we give to each factor will depend upon the circumstances of each particular case. The circumstances that caused the delay in disposing of the ownership interest are more important than the length of the delay. The amount of any potential capital gain or loss is not relevant to whether the discretion is exercised.

We will not allow a longer period for even a very short delay beyond two years if there are no relevant circumstances present. Likewise, a lengthy delay will not prevent us from allowing a longer period where relevant circumstances caused the delay and persisted for the overwhelming majority of the total period.

Generally, 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.

In your circumstances, a decision was made to permit you to continue to reside in the property, the delay was not caused by reasons beyond your control that existed for a significant portion of the first two years.

The will gives you and your sibling ownership of the dwelling, but it does not give any beneficiaries the right to reside/occupy. Accordingly, the capital gain made on the disposal of the dwelling is not disregarded.

All the relevant legislative provisions used and listed in this notice of decision can be accessed by the general public.