Private ruling: Commissioner's discretion - deceased estate
Date of advice: 11 August 2023
Published: 25 September 2023
Ruling period: Year ended XX June 20XX
Date scheme commenced: Early 20XX

Ruling: Q1: Will the Commissioner exercise his discretion under section 118-195 of the Income Tax Assessment Act 1997 to extend the period to dispose of the deceased's ownership of interest of a dwelling up to two (2) hectares? | A1: No.

Relevant facts and circumstances: The deceased died in early 20XX The property was purchased with their child XXXXX in 19XX. The deceased and this child XXXX were tenants in common in equal shares in the property. The property was used as the main residence of the deceased until their death and it was not then used or used to produce assessable income. After their death the property was occupied by the deceased spouse and one of beneficiaries. The deceased left their 50% share in the property to their children. The deceased's spouse was not provided for in the will. The beneficiaries chose not to seek probate and allow their other parent, the deceased spouse to remain living in the property until early 20XX until they were moved into a residential aged case facility. Shortly afterwards the deceased spouse passed away. Late 20XX one of the four beneficiaries engaged legal representation in an effort to progress the administration of the deceased estate. There were several issues to be overcome before probate could be granted. There was the mortgage in joint names of the deceased name and their child, due to this the lawyers were not able to get a substantive response to mortgage matters and were required to seek copies of the original loan documents, there was difficulty in obtaining a valuation of the half share in the property as the date of death of the deceased in 20XX. In May 20XX, the Registrar of Probates issued a requisition in relation to the qualifications of the interpreter who was said to have translated the Will for the deceased. Inquiries revealed that the interpreter was now suffering dementia and lacked capacity to provide an Affidavit. One of the subscribing witnesses then had to provide an Affidavit of due execution. This involved locating the solicitor who drew up the Will and reviewing the matter with them. This Affidavit was sworn in June 20XX Probate was obtained in June 20XX to one of the beneficiaries, with leave reserved to their siblings. XXXX commenced a Part IV claim and also an estoppel claim in relation to the estate's half share in the property. In mid-December 20XX, XXXX solicitor made a further request to the other three siblings to consent to an extension of time as the six months period for the Part IV claim was due to expire and XXXX would have to otherwise incur costs to issue the claim. The siblings agreed to the extension, effectively binding XXXX as executor beyond the original terms of the undertaking In late 20XX when the first deed of settlement was signed - another of the beneficiaries raised via his solicitor that they had an equitable interest in the property as a result of a purported estoppel claim. The siblings denied this claim had merit and proceeded to draft a Deed of Settlement and Release to the exclusion of XXXXX, in an attempt to progress the administration of the estate. The Deed of Settlement was purportedly signed in mid 20XX however XXXXXX solicitor advised that XXXX signed counterpart was not received until mid 20XX. The property was listed after mid 20XX and the property was sold in late 20XX. The Property was less than 2 hectares.

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

Reasons for decision: Summary: The Commissioner will not exercise his discretion under section 118-195 of the Income Tax Assessment Act 1997 to extend the period for disposal as you have not met the relevant criteria for an extension. | Detailed Reasoning - Detailed reasoning: Subsection 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you may disregard a capital gain or capital loss made on a dwelling acquired from a deceased estate 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 Capital gains tax and deceased estates - considers the Commissioner's discretion to extend the 2-year period to dispose of dwelling acquired from a deceased estate - considers the Commissioner's discretion to extend the two-year period to dispose of dwelling acquired from a deceased estate and 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; or • 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 the Commissioner has decided not to exercise his power to extend the two year period available to the Trustee of the deceased estate to dispose of the inherited properties for the purposes of section 118-195 of the ITAA 1997. | Detailed Reasoning - Conclusion: In this case, we are not satisfied that any of the beneficiaries had commenced any of the proceedings required to obtain probate within a reasonable period of time. The first legal action towards obtaining probate was not made until late 20XX. At this point, the two year period to dispose of the inherited properties to be able to disregard any capital gain or capital loss made on the disposal of the properties had already passed. The period of time from deceased date of death to the date probate was granted exceeded eight (8) years. It has been stated that the beneficiaries/trustees consciously chose not to seek probate within the 2 years to allow for the deceased's spouse (not given right to occupy the dwelling under the deceased's will) to remain living in the deceased's property. This did not physically prevent them from performing their duties, this was a choice by beneficiaries of the deceased's family from early 20XX until mid 20XX. We accept that there may have been issues with the deceased's family members, however any of the beneficiaries could have independently applied to the Supreme Court to be granted the probate and be appointed as the Trustee of the deceased's estate after 28 days had passed from the deceased's date of death. However, based on the information and documentation provided, no one had applied for the granting of the probate until mid 20XX. After XXXX had been appointed as the executor of the deceased's estate in mid 20XX, settlement on the property had occurred XXXX years later. However, we are looking at the whole period since the deceased passed away when determining whether the Commissioner will exercise his discretion to extend the two year period to dispose of an inherited dwelling. In this case, that period is from: • Early 20XX until late 20XX in relation to the deceased property, being a period of over 11 years. It is clear that the Commissioner's discretion is meant to be limited to situations where the owner is effectively prevented from selling the property. The intention of the two year period is to allow the orderly and timely sale of deceased estate property. Based on the information and documentation provided with this private ruling it has been determined that the Commissioner's discretion will not be exercised to extend the two year period as 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 properties, any capital gain or capital loss made on the disposal of the deceased's properties cannot be disregarded.