Private ruling: Commissioner's discretion - deceased estate
Date of advice: 21 February 2024
Published: 8 April 2024
Ruling period: Year ending 30 June 2024
Date scheme commenced: 1 July 2023

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 dwelling acquired from a deceased estate and disregard the capital gain or capital loss you made on the disposal? | A1: No.

Relevant facts and circumstances: The deceased inherited the property on the death of their spouse. The deceased died sometime after inheriting the property. The deceased's children inherited equal shares in the property. The property was the deceased's main residence. The property has never been used to produce assessable income from rent or investment. The property is less than 2 hectares in size. Towards the end of the year following the date of death, the children of the deceased began to communicate via their respective lawyers in regard to the administration of the deceased's estate. A few months later the children made an application to the Court for Letters of administration. The Court granted Letters of administration in the month after the application was lodged. During the next couple of months, the Certificate of Title for the property was registered in the name of the administrator of the estate. During the same period the maintenance and repairs were carried out on the property and negotiations were conducted with real estate agents. A contract for sale was signed by the purchaser in the year following the grant of Probate. The contract for sale was signed by the vendor a couple of days after it had been signed by the purchaser. Property settlement occurred in the month after the contract for sale was signed.

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

Reasons for decision: Summary: A capital gain or capital loss is made as a result of a capital gains tax (CGT) event happening to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). The most common CGT event is CGT event A1 the disposal of a CGT asset. Subsection 118-195(1) of the ITAA 1997 provides that a trustee of a deceased estate disregards a capital gain or loss from a dwelling that a deceased person acquired before 20 September 1985 if: (1) the trustee's ownership interest ends within 2 years of the deceased's death, or (2) from the deceased's death until the trustee's ownership interest ends, the dwelling was the main residence of one or more of the following persons: (a) the spouse of the deceased immediately before death; or (b) an individual who had the right to occupy the dwelling under the deceased's will; or (c) an individual who brought about a CGT event where the ownership interest in the dwelling passed to the same individual as a beneficiary. You have an ownership interest in a property if you have a legal interest in the property. This means that if you sell a property, your ownership interest continues until the date of settlement (rather than the date the contract of sale is signed). The following is a non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion to extend the time period in which you can dispose of the property: • the ownership of a dwelling or a will is challenged; • the complexity of a deceased estate delays the completion of administration of the estate; • a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury); or • settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control. In determining whether or not to grant an extension the Commissioner is expected to consider whether, and to what extent, the dwelling is used to produce assessable income and how long the trustee or beneficiary held it. The delays that occurred in relation to the sale of the property were not out of the control of the executors. No evidence has been provided that shows that there were circumstances outside the administrators control during the 2 year period. While we acknowledge that there were interpersonal issues between the deceased's children that resulted in them using lawyers to communicate, this does not constitute the equivalent of a legal challenge to the Will. Based on the information provided it does not appear that any action was taken to progress the administration of the estate for a number of months after the date of death. In contrast, once lawyers were engaged to facilitate the communication between the deceased's children, the estate progressed to sale of the property within 9 months. This reinforces the view that there were no complex aspects to the administration of the estate that prevented it being finalised within the standard 2 year period. The Commissioner does not consider that the difficulties in relation to the administration of the estate were outside of the control of the executors. Having considered the relevant facts, we will not apply the discretion under subsection 118-195(1) of the ITAA 1997 to allow an extension to the two-year time limit. Therefore, the normal capital gains tax (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. The cost of repairs can also be included in the cost base of the property. You are also entitled to the 50% CGT discount in relation to the property.