Private ruling: CGT - deceased estate
Date of advice: 8 June 2022
Published: August 2022
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the commissioner exercise his discretion under section 118-195 of the Income Tax Assessment Act 1997 to extend the two-year period to dispose of the deceased's ownership interest in the dwelling and disregard the capital gain or loss you make on the disposal? | A1: No.

Relevant facts and circumstances: The deceased owned the property which was purchased on 22 May 19XX. The deceased owned the property jointly with her spouse from 14 December 19XX. The deceased spouse died on 10 June 20XX. The property comprises of less than 2 hectares. The deceased was living in a nursing home and treated the property as her main residence until the date of their death. The deceased died on 1 May 20XX. On 27 May 20XX the executors first met with lawyers. On 13 June 20XX the lawyers sent a letter of advice and cost agreement to the executors. The letter of advice from lawyers set out that the property needed to be settled within 2 years from the date of death. One of the executors was in hospital and did not receive the letter and therefore was not aware that the property needed to be settled within 2 years from the date of death. As one of the executors was still suffering the long-term effects of illness and it was winter, the executors did not attempt to sell the house. On 30 August 20XX probate was granted. The other executor had an operation and therefore could not move furniture. Due to health conditions of the executors, they were unable to clean out the property on their own and needed help from younger family members. On the long weekend in June 20XX the family started clearing out the property. In mid-20XX the executors arranged for charities to take remaining items. On 29 October 20XX the executors engaged with real estate agent to sell the property. On 4 December 20XX the property sold at auction. On 18 February 20XX settlement occurred and titles were transferred.

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. Paragraph 13 of PCG 2019/5 stated that 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: • 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 • delay due to refurbishment of the house to improve the sale price In considering whether to extend the two-year period all the factors both in favourable and against the granting of the Commissioner's discretion must be considered. It is noted that one of the executors was in hospital at the time the letter from the lawyers was sent. However, this was several months before probate had been granted and based on the information provided from the time probate was granted there was approximately 9 months of inactivity. While it is appreciated that being winter was not convenient for the executor, who was still suffering the long-term effects of XX, to attend to the property it would not be unreasonable to engage third parties to assist in clearing the property and preparing it for sale. You began clearing out the property in June 20XX and in mid-20XX you arranged for charities to take the remaining items from the property. We consider that the significant amount of time spent on clearing out the property between June 20XX to mid-20XX contributed to the improvement of the condition of the property and consequently constitutes refurbishment of the property to increase the sale price. We have considered all the circumstances that 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 and 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.