Private ruling: Commissioner's discretion - deceased estate
Date of advice: 1 December 2023
Published: 22 January 2024
Ruling period: Year ending 30 June 2024
Date scheme commenced: 1 July 2023

Ruling: Q1: 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 to dispose of the ownership interest in the property (the Property) and disregard the capital gain made on the disposal? | A1: No.

Relevant facts and circumstances: The deceased passed away several years ago. The property was the deceased's main residence for the whole of his ownership period. The property was never used to produce income. The property was less than 2 hectares in size. Probate was granted in the year following the date of death. The property was purchased by the deceased prior to 1985. The deceased's grandchild moved into the property after their death for security purposes and because they intended on purchasing the property. The grandchild was a beneficiary under the will but did not have a right to reside in the property under the will. The reasons for the delay in selling the property within the 2 year time is as follows: The grandchild wanted to purchase the property. The grandchild needed to obtain finance to purchase the property. Covid-19 hit and the grandchild did not want to be vaccinated. He did not work from October 2020 to April 2021. The grandchild finally got vaccinated and went back to work. The grandchild had the deposit saved up but could not pay a loan which held things up until he went back to work. Once the grandchild was back working, they went to the bank for a loan but was not able to secure a loan due to the high interest rate and mortgage insurance, due to the valuation of the property. The grandson then approached the executors of the estate to see if they could assist the grandchild and they gave them an amount of money off the purchase price taking this amount from their inheritance. The executors needed to get all parties to sign an agreement and one party took time to do this. It was over a number of months before it was all sorted. The grandchild then went back to the bank and was able to secure a loan. Settlement for the property occurred more than two years after the date of death.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-110 | Income Tax Assessment Act 1997 subsection 118-195(1)

Reasons for decision: Summary: The main residence exemption in section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to disregard a capital gain or capital loss a taxpayer makes from a capital gains tax (CGT) event that happens to a dwelling that is their main residence. If a taxpayer inherits an ownership interest, subsection 118-195(1) of the ITAA 1997 applies so that any capital gain or capital loss they make from a CGT event that happens in relation to a dwelling or their ownership interest in a dwelling is disregarded if: • They are an individual and the interest passed to them as a beneficiary in a deceased estate, or they owned it as the trustee of a deceased estate; and • The deceased acquired the ownership interest 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 • Their ownership interest ends within two years of the deceased's death, or within a longer period allowed by the Commissioner. Where the deceased acquired the property prior to 20 September 1985, the dwelling was from the deceased death until your ownership interest ends the main residence of one of the following: • the spouse of the deceased immediately before their death (but not a spouse who was permanently separated from the deceased) • a person who has a right to occupy the property under the deceased's will • you, as a beneficiary, if you dispose of the property as a beneficiary. Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example: • The ownership of a dwelling or a will is challenged. • The complexity of a deceased estate delays the completion of administration of the estate. • A trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury). • Settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control. Factors that would weigh against the granting of the discretion include: • Waiting for the property market to pick up before selling the dwelling. • Property used to earn assessable income. • Unexplained periods of inactivity by the executor in attending to the administration of the estate. The above examples are not exhaustive. In addition, once any circumstances preventing the sale of the Property have been resolved, the Property needs to be placed on the market as soon as possible to enable its disposal. | Detailed Reasoning - Application to your circumstances: The delay in selling the property was due to the executors allowing the deceased's grandchild to live in the property after the deceased passed away while they were trying to get the finance to purchase the property. The reasons for the delay in selling the property was due to the grandchild not willing to be vaccinated and therefore was not able to work and service a loan. The grandchild did not have the right to live in the property under the terms of the will. The grandchild was not able to obtain a loan due to the high interest rates and the requirement that they had to pay mortgage lenders insurance. The finance was eventually obtained and the grandchild purchased the property a number of years after the deceased passed. None of the above circumstances are out of the executor's control. In this regard, we consider that the delay was not outside your control. It is for the above reasons that you do not meet the requirements for the Commissioner to extend the 2-year time period as the property could have been sold at an earlier stage. The Commissioner will not be exercising his discretion to extend the 2-year period for you to dispose of the Property. Therefore, any capital gain made on the property from the date the deceased passed away until the Property was disposed of will be subject to tax. Australian tax residents are entitled to the 50% CGT discount in relation to the property.