Private ruling: CGT - deceased estates
Date of advice: 19 April 2023
Published: 5 June 2023
Ruling period: Year ending 30 June 20YY
Date scheme commenced: DD MM YYYY

Ruling: Q1: Will the Commissioner allow an extension of time for you to dispose of your ownership interest in the property and disregard the capital gain or loss you made on the disposal? | A1: No.

Relevant facts and circumstances: The deceased passed away on DD MM YYYY. The deceased acquired the property before 20 September 1985. The property was the deceased's main residence immediately prior to their passing. There was a dispute over the will of the deceased. Proceedings were commenced and the matter was settled on DD MM YYYY. Probate was granted on DD MM YYYY. On DD MM YYYY, the executor transferred a X share of the property to you in accordance with the will of the deceased. Due to restrictions to combat the spread of Covid 19, you were unable to travel to the property to prepare it for sale for periods during YYYY. The restrictions on movements to combat Covid 19 ended in MM YYYY. By MM YYYY, you had reached an agreement with your child and their spouse, who are the other co-owners of the property, to sell your X share of the property to them. The transfer of your interest in the property was delayed after the lawyer who was initially engaged to complete the conveyancing work resigned from the company and instructions for the sale of contract documentation was not communicated on handover to another lawyer. On DD MM YYYY, a close friend of your child and their spouse passed away unexpectedly. The co-owners of the property were forced to isolate after catching Covid in MM YYYY. You entered into a contract to sell the property on DD MM YYYY with settlement occurring on DD MM YYYY.

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

Reasons for decision: Summary: Subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides 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 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 then 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). The Commissioner has discretion to extend the two-year time period where the trustee or beneficiary of a deceased estate's ownership interest ends after two years from the deceased's death. 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. This discretion may be exercised in situations such as where: • the ownership of a 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 a deceased estate delays the completion of administration of the estate • settlement of the contract of sale of the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control • restrictions on real estate activities imposed by a government authority in response to the COVID-19 pandemic These examples are not exhaustive. They provide guidance on what factors the Commissioner would consider reasonable to exercise his discretion to extend the two-year period. PCG 2019/5 also outlines factors that would weigh against the Commissioner allowing a longer period. Some factors include inconvenience on the part of the trustee or beneficiary to organise the sale of the dwelling or unexplained periods of inactivity by the executor in attending to the administration of the estate. Whether the Commissioner will exercise his discretion under subsection 118-195(1) of the ITAA 1997 will depend on the facts of each case. | Detailed Reasoning - Application to your situation: In your circumstances, there was a delay in the administration of the deceased estate caused by a challenge to the will of the deceased. The delay was considerable, taking just over two years to resolve. The Safe Harbour outlined in PCG 2019/5 does not apply to your circumstances. Although there was a legal challenge that lasted throughout and beyond the first two years after the date of death, the property was not listed for sale as soon as practicable, it was not actively managed and sold within 12 months of listing, and the period for which you would require the discretion to apply exceeds 18 months. After the dispute was settled and transfer of a share of the property to you as a beneficiary of the estate had occurred, there was a period where you could not access the property to prepare it for sale due to restrictions put in place to combat Covid 19. These are factors that weigh in favour of the Commissioner exercising the discretion to extend the two-year period to dispose of your ownership interest in the dwelling. Your ownership interest in the property was transferred to you on DD MM YYYY and you disposed of your ownership interest almost X months later, on DD MM YYYY. Whilst access to the property was restricted due to lockdowns and travel restrictions imposed to combat the spread of Covid 19, these restrictions were lifted by MM YYYY, approximately X months after your ownership interest was transferred to you. By MM YYYY, the co-owners of the property had decided to buy your X share of the property and these plans had become definite by MM YYYY. However, the sale of your share was not settled until MM YYYY. You have attributed the further delays in disposing of your ownership in the dwelling after this time to various factors including: a lack of communication between your legal representatives; multiple drafts of the contract of sale being prepared and reviewed by the parties involved in the sale; the death of a close friend of your child and their spouse; your child, their spouse and grandchild contracting Covid and being unwell for a number of weeks, and your child and their spouse working long hours in their jobs and having a young family. It took over X months from the time Covid 19 restrictions on travel were eased for you to dispose of your ownership interest in the property. After your child and their spouse had agreed to purchase the property in MM YYYY, it took a further X months to dispose of your interest in the property. Although the co-owners were in isolation due to COVID for a period of time during MM YYYY, this does not appear to have caused a significant delay. The contract for sale was entered into DD MM YYYY and settled DD MM YYYY. Other factors indicate that inconvenience on behalf of the parties to the sale contributed significantly to the delay, rather than circumstances beyond your control preventing the disposal of your interest. Paragraph 13 of PCG 2019/5 outlines factors that cannot be material to delays in the disposal of the property. Amongst these factors are inconvenience on the part of the trustee or beneficiary to organise the sale of the dwelling. Issues such as your child and their spouse working long hours in their jobs and having a young family indicate that some of the delay was caused by inconvenience in organising the sale of the property. We have determined that the Commissioner's discretion will not be exercised to extend the two year period. It is viewed that the facts of this situation are not of a nature that would be acceptable for the exercising of the Commissioner's discretion. As the Commissioner has not exercised his discretion to extend the two year period to dispose of the deceased's property, any capital gain or capital loss made on the disposal of the deceased's property cannot be disregarded. 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. The cost of repairs can also be included in the cost base of the property. As you are taken to have acquired your interest in the dwelling on the date the deceased passed away, you are also entitled to the 50% CGT discount in relation to the property.