Private ruling: CGT - deceased estate
Date of advice: 5 February 2025
Published: 24 March 2025
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

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 for you to dispose of your ownership interest in the property and disregard the capital gain or capital loss you made on the disposal? | A1: No.

Relevant facts and circumstances: The deceased purchased the property at xx xx xx, xx, xx in MM 19YY. The property is less than 2 hectares. The property was the deceased's main residence and never used to produce income. The deceased moved to a nursing home facility in MM 20YY. The deceased passed away on DD MM 20YY. The deceased's will appoints their children as executors. The executors did not apply for probate. The will leaves their estate to their children; their interest in a XXXX to one child and the remainder of their estate, including the dwelling, to be divided between their other children as an interest each, except one child who is to receive two interests. The property was first listed for sale on DD MM 20YY while the deceased was in nursing home care. However, the property did not sell and was withdrawn from sale in MM 20YY. The property was left vacant from the time the deceased moved to nursing home care, apart for a short period between when one of the executors stayed at the property to sort and pack the belongings of their parent. In MM 20YY, two of the beneficiaries, sought legal advice regarding investigation of the deceased's management as trustee of the family trust and documentation regarding the estate from the executors. The beneficiaries' legal representatives wrote to the defendants on several occasions throughout 20YY and 20YY seeking documentation and the lack of progress in providing the information requested. During 20YY and 20YY, one of the executors spent time looking for documentation and records pertaining to the claim lodged by two of the beneficiaries. Another executor was preoccupied with his work and did not attend to their executorship duties. They were later diagnosed with an XXXXX illness in MM 20YY and from then on attended to the wind-up of the farm which was completed in MM 20YY. The third executor took no action to assist in administering the estate. One of the executors travelled to xx in 20YYon holiday for a period of approximately XXXX weeks. A Notice of Intent was issued in MM 20YY to one of the trustees of the family trust and the estate. Throughout 20YY one of the executors endeavoured to find records regarding the family trust and its winding up that had occurred in 20YY. One of the other executors found the relevant documents in their possession in MM 20YY. In MM 202YY a Statement of Claim was lodged against xx xx and the estate. The claim sought compensation for a breach of fiduciary duty by the trustees of the family trust, which operated a XXXX activity for the benefit of the family, and the later transfer and sale of the trust property. The deceased's dwelling was not an asset of the family trust. The property was again listed for sale in MM 20YY and later withdrawn. The claim against xx xx and the estate was discontinued on DD MM 20YY. On DD MM 20YY the Supreme Court of XXXX confirmed that one child remained an executor of the estate and their purported renunciation of such was ineffective. One of the executors renounced his executorship on DD MM 20YY. Titles xx confirmed title transfer of the property one of the executors as legal personal representative of the estate on DD MM 20YY. The third executor was diagnosed with a XXXX illness in 20YY and passed away on DD MM 20YY. The property was listed for sale on DD MM 20YYand 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: Summary: A capital gain or capital loss may be disregarded where a capital gains tax event happens to a dwelling if you owned it as the trustee or beneficiary of the deceased estate. 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 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. After the deceased passed away, you owned the property as trustee of the estate. The property was the deceased's main residence until just before they passed away and was not used to produce assessable income at that time. The property settled more than two years after the deceased's death. Therefore, you require the Commissioner's discretion to extend the two-year period to be eligible for an exemption. 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. The executor or trustee of the deceased estate must satisfy 5 conditions to qualify for the safe harbour. The first condition is that, during the initial 2-year period after the deceased's death, over 12 months are spent addressing one or more of the following circumstances: • 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; • administration of the estate is delayed due to the complexity of the deceased 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. The second condition is that the dwelling must be listed for sale as soon as practically possible after those circumstances are resolved. Three, the sale must be settled within 12 months of the listing. Four, the following factors are immaterial to the delay in disposing of the dwelling and would weigh against the Commissioner allowing a longer period: • 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. The final condition requires that there be no more than an 18-month extension to the 2-year period for disposal. In the event that the safe harbour conditions are not met, the PCG also outlines factors that the ATO may consider when weighing up whether or not to exercise the Commissioner's discretion: • 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. Paragraph 14 of PCG 2019/5 explains we weigh up all of the factors (both favourable and adverse). In your case, we consider as favourable factors that the property was not used for income producing purposes. We also considered: • there was no challenge to the ownership of the property or to the deceased's will; • there was no life interest in the deceased's will that caused a delay in the disposal of the dwelling; • there were no factors from the time of the deceased's death that explain the executors' inability to attend to disposing of the property. Although there was a claim lodged against the estate this was in relation to a family trust and had no effect on the ability to dispose of the property. You have not demonstrated that the claim prevented the sale of the dwelling; • there was no delay in settlement of the contract of sale over the property. There were no complexities regarding the deceased estate. There were no extenuating circumstances that are considered complex that prevented the estate being administered in that, there were no challenges to the executors and they accepted their role to administer the estate. There were periods of inactivity where it appears the executors did not actively take steps to attend to progressing the sale of the property. Considering there were no major repairs or renovations done to the property, the lengthy delays are unsupported. Although we acknowledge there were serious personal circumstances arising such that two trustees were unable to attend to the estate's administration, this did not occur until several years after the death of the deceased. Personal disagreement on managing the estate, individual financial affairs, full-time work and related commitments are considered inconveniences on the part of the trustees in organising the sale of the house. The information provided in your application does not provide the delay in selling the property was caused by any of the circumstances described as favourable factors as outlined in paragraph 12 of PCG 2019/5, for example, legal challenges to the ownership of the dwelling or challenges to the will. The Commissioner's discretion is limited to situations where it was not possible for the trustee or beneficiaries to sell the property before the time it was actually sold. The intention of the two-year period is to allow the orderly and timely sale of deceased estate property. Although there will be circumstances in which it is understandable why the trustee or beneficiaries may decide to retain the property rather than selling it, this remains a choice and in these circumstances an extension of time will not be granted. Therefore, 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 for the reasons outlined above. 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.