Private ruling: CGT - deceased estate - main residence exemption
Date of advice: 16 January 2023
Published: 27 February 2023
Ruling period: Year ended 30 June 20YY
Date scheme commenced: DD MM YYYY

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 so that the capital gain made on disposal of the dwelling can be disregarded? | A1: No.

Relevant facts and circumstances: The deceased acquired the dwelling located at the property with her husband in 19YY. The deceased's husband passed away in 20YY. The deceased treated this property as their main residence until the date of their death. The property is X m 2 in size. The deceased died on DD MM YYYY. Probate was granted on the DD MM YYYY. The deceased's children were appointed as executors to the estate. The property was cleaned out and renovations commenced on the DD MM YYYY. On the DD MM YYYY the property was renovated and cleaned ready for occupancy. From the DD MM YYYY to the DD MM YYYY xxxx experienced X separate COVID-19 lockdowns and spent a total of X days in lockdown. The property was rented out and earning assessable income until the decision was made to sell the property. During the period of July 20YY to January 20YY Executor A received a medical diagnosis and subsequent treatment. The property was advertised for sale on the DD MM YYYY. The property sold on the DD MM YYYY. The property settled on the DD MM YYYY.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-195

Reasons for decision: Summary: Subsection 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss made on a dwelling acquired from a deceased estate may be disregarded if: • The property was acquired by the deceased estate 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 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 this period in certain circumstances) Practical Compliance Guideline PCG 2019/5: The Commissioner's discretion to extend the two-year period to dispose of dwelling 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. 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 sizeable portion of the first two years and there are no significant factors that weigh against the allowing of an extension. 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 administration of the estate; • settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of your control; • restrictions on real estate activities imposed by a government authority in response to the COVID-19 pandemic. The absence of some or all of those favourable factors does not necessarily preclude us from allowing a longer period. There are several factors that mitigate against the granting of the discretion. These 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 In considering whether to extend the two-year period all the factors both in favour and against the granting of the Commissioner's discretion must be considered. In this case it is noted that you chose to rent out the property after the deceased's death. In this regard, we consider that you had the opportunity to sell the property but made the decision not to do so. You have stated that the COVID-19 restrictions and subsequent lockdowns during the 20YY and 20YY calendar years impacted your ability to dispose of the property within the two-year time frame. Whilst it is noted that COVID-19 impacted the movement of individuals and the ability of prospective buyers to view properties throughout parts of the 20YY and 20YY calendar year, this reason alone is not sufficient enough to support the delay in the sale of the property. Furthermore, it is noted that there were COVID-19 lockdowns in xxxx over the period of the DD MM YYYY to the DD MM YYYY which lasted for a total of X days. In this regard, we consider that you had the opportunity to sell the property after the first xxxx lockdown which finished on the DD MM YYYY as evidenced by the property being vacant and ready for occupancy on the DD MM YYYY. You have also stated that Executor A's illness weighed heavily on both executors, though mostly on Executor A themselves and that the decision was made that the other executor, Executor B, would not attend to the estate and the disposal of property during Executor A's illness. In this regard, we understand that Executor A's illness and subsequent treatment is outside of their control. However, we are of the view that the decision made for the other executor to not focus on the administration of the estate was within the control of both executors of the estate. We consider the choice of the executors not to attend to the administration of the estate is a mitigating factor against the granting of the discretion. We have considered all of the circumstances you have provided but, as there was a significant period of delay that was not outside of your control, the Commissioner will not exercise his discretion to grant an extension of time. 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, however you will be entitled to a 50% discount on the CGT if you own the property for at least 12 months.