Private ruling: CGT - deceased estate
Date of advice: 16 May 2025
Published: 21 July 2025
Ruling period: Year ending 30 June 20YY
Date scheme commenced: 1 July 20YY

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 xxx xxx on DD MM 19YY. The property is less than 2 hectares. The deceased also acquired a one-third interest in the property at xx xxx xxx with their two siblings on DD MM 20YY. This property was sold in MM 20YY. The deceased resided at the property until approximately 20YY, when they went to live with their parent as carer. The deceased suffered from a mental health condition. The property was never used to produce income and primarily left vacant. On occasion the deceased moved between this property and their parents' home. The deceased was residing at the property when they passed away. The deceased passed away on DD MM 20YY. The deceased died intestate. The deceased had six children, two of whom are minors. On DD MM 20YY, the eldest child of the deceased was granted Letters of Administration for the estate. Shortly after the deceased's death, the administrator discovered the property was occupied by a squatter. The squatter was evicted and the property's locks changed. The property was in a dilapidated state. On DD MM 20YY the administrator obtained a real estate appraisal that advised should the property undergo significant repairs the sale price would be increased. On DD MM 20YY, the minor beneficiaries, through their litigation guardian, filed a motion with the Supreme Court to remove the administrator, contending they had delayed the administration of the estate, resided at the property without paying rent, and had allowed the property to remain in a derelict state. On DD MM 20YY the Supreme Court discharged the administrator and replaced them with an independent solicitor. On DD MM 20YY the administrator obtained a professional valuation of the property that advised the property was in a poor state and uninhabitable in its current condition. Between MM 20YY and MM 20YY significant refurbishment and repairs were undertaken on the property. The property was listed for sale 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. 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, the Commissioner's discretion is required 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 the executor's 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; • the deceased died intestate and as there was no will no life interest was granted that would cause a delay in the disposal of the dwelling; • there were no factors from the time of the deceased's death explained why the administrator was unable to attend to disposing of the property. • it was stated that shortly after the deceased's death a squatter was discovered occupying the property and then evicted, it has not been demonstrated how this affected the delay in the sale of the property; • there was no delay in settlement of the contract of sale over the property. There were no complexities or extenuating circumstances made clear that support the prevention of the estate being administered and the administrator accepted their role to administer the estate. There were periods of inactivity extending beyond the first two years from the deceased's death where it appears the administrator did not actively take steps to attend to progressing the sale of the property. Although we acknowledge there were personal circumstances arising that may have troubled the administrator, it has not been explained how this impacted disposing of the property and the lengthy delays are unsupported. COVID-19 restrictions affected individual movement and real estate viewing and sales for various periods between MM 20YY and MM 20YY. However, it has not been explained how the sale of the property was impacted by any restrictions. More than two years after the deceased's death, the administrator was replaced by an independent legal representative as a result of action taken by the litigation guardian on behalf of the minor beneficiaries due to inactivity and protracted delay regarding administration of the estate. Actions taken by the administrator for the period following the deceased's death and the appointment of a replacement administrator have not been detailed or clarified. It has not been adequately demonstrated what prevented the sale of the dwelling. Between MM 20YY and MM 20YY significant refurbishment and repairs were undertaken on the property. How the property came to be in a semi-demolished state has not been explained. Details regarding the undertaking of necessary repairs have not been specified, and the reasons why these works were carried out some three and a half years after the deceased's death have not been rationalised. Nor has it been clarified why and who made the decision to carry out the refurbishment. Practical Compliance Guideline, PCG 2019/5 provides in Example 3 circumstances where repairs may be required before a property can be advertised for sale. However, the example also demonstrates that renovations completed to improve the value of a dwelling before sale is a decision within the control of the trustee. These circumstances are considered an unfavourable factor. 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 estate. 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.