Private ruling: CGT - deceased estate
Date of advice: 18 July 2023
Published: 4 September 2023
Date scheme commenced: 1 July 20XX.

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 you make on the disposal under section 118-195 of the Income Tax Assessment Act 1997 ? | A1: No. This private ruling applies for the following period: 1 July 20XX to 30 June 20XX.

Relevant facts and circumstances: In XX/20XX, the Deceased passed away. As at the date of death, the Deceased owned the Property. The Property was acquired prior to 20 September 1985 and was less than 2 hectares in land size. In XX/20XX, probate of the will was granted to you as the executor. You took up temporary residence in XX/20XX at the Property. You stayed at the Property for various lengths of time to perform maintenance tasks to prepare the Property for sale. The lengths of time you stayed at the Property was between XX to XX weeks, and longer stays of XX to XX months between 20XX and 20XX. Your usual home is over XX kilometres from the property, and you returned there at times. Damage occurred to the Property in XX/20XX. An insurance investigator assessed the damage and approved the claim but discovered problems not covered by insurance. Repairs and maintenance tasks were undertaken. Access to the property was restricted at various times due to natural disasters and COVID-19 lockdowns and restrictions. You signed an agency agreement with a real estate agent on XX/XX/20XX and the property was then listed for sale. Your solicitor prepared a draft contract and sent this to the selling agent on XX/XX/20XX. The agency agreement was re-signed every XX months as the agency was reengaged to continue with marketing until the sale of the property was achieved. The property was advertised locally in XXX. In XX/20XX, the listing was removed from the online websites for XX days before re-listing in XX/20XX. All other marketing was always active. You held appointments, inspections, and open homes during the period between the listing and the eventual sale. You received two offers on the Property in XX/20XX which did not eventuate. Between XX/20XX and XX/20XX some restrictions on face to face real estate appointments were in place. In XX/20XX, you received a third offer on the Property which you accepted after brief negotiations. Settlement of the contract for sale occurred in XX/20XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-195 Summary | An extension to the 2 year period to dispose of a dwelling is generally only allowed where the dwelling could not be sold and settled within two years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first two years. | Detailed reasoning | Subsection 118-195(1) of the 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 (PCG 2019/5) outlines the factors that the Commissioner will consider when determining whether to exercise the 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 further outlines that to qualify for the safe harbour, you must satisfy all of the following conditions: | • during the first 2 years after the deceased's death, more than 12 months was spent addressing one or more of the circumstances described in paragraph 12 of this Guideline | • the dwelling was listed for sale as soon as practically possible after those circumstances were resolved (and the sale was actively managed to completion) | • the sale was completed (settled) within 12 months of the dwelling being listed for sale | • if any of the circumstances described in paragraph 13 of this Guideline were applicable, they were immaterial to the delay in disposing of your interest, and | • the longer period for which you would otherwise need the discretion to be exercised is no more than 18 months. | Paragraph 13 of PCG 2019/5 outlines that to qualify for the safe harbour, none of the following circumstances can have been material to the delay in disposing of your interest in the property: | • waiting for the property market to pick up before selling the dwelling | • waiting for refurbishment of the dwelling to improve the sale price | • 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. | Application to your circumstances | In considering whether to extend the two year period, we weigh up all of the factors (both favourable and adverse) having regard to the facts and circumstances of the case. | In your case, the favourable factors are the repairs in XX/20XX, which caused a delay that was outside your control. The favourable factors are also the events that restricted your access to the Property, being the natural disasters and COVID-19 travel restrictions. We calculate that these caused a maximum delay of XX months during the first two years of the Deceased's death (i.e., Between XX/20XX and XX/20XX). | The unfavourable factors are the improvements to the Property to enhance its value. We note that some improvement work was undertaken in XX/20XX, XX months after the date of death. Whilst there was XX months between the date of death and the repairs to the XX where you were unable to access the Property, there was XX months where these repairs could've been undertaken, particularly when you were living at the Property at times for between XX week to XX months. The majority of the more complex repairs were a flow-on affect from XXX, and therefore these were not attended to until after XXX had been repaired in XX/20XX. Your ability to list the property for sale was therefore delayed because XXX until XX months after the date of death. | Following the improvement work in XX/20XX, you engaged a real estate agent in XX/20XX, some XX months later. The Property was then on the market until XX/20XX when you accepted an offer. | Having considered the relevant facts, we consider that there were unexplained periods of inactivity in attending to the administration of the estate and we will therefore not apply the discretion under section 118-195 of the ITAA 1997 to allow an extension to the two-year time limit. Accordingly, the normal capital gains tax rules will apply to the disposal of the property. | You should note that the first element of your cost base for the Property is the Deceased's cost base on the Deceased's date of death. You are also entitled to the 50% CGT discount in relation to the property.