The sale of a person’s main residence (ie their home) is generally exempt from capital gains tax. This exemption is ‘carried through’ to beneficiaries or executors of deceased estates who seek to dispose of the deceased’s main residence, where certain conditions are satisfied.
Disposal within two years of death
Where a beneficiary or executor disposes of a dwelling that was the deceased’s main residence and was not being used to produce assessable income just before they died, or the dwelling had been acquired by the deceased before 20 September 1985, any capital gain may be disregarded if the disposal occurs within two years of the deceased’s death.
In order to qualify for this two-year exemption, it is not enough that the sale contract is executed within this period; the ownership interest held by the executor or beneficiary must actually cease within this time. This means that settlement must take place within the two years. Executors or beneficiaries may accordingly find that they have exceeded the two years due to a misunderstanding of how the exemption operates.
The Commissioner has a discretion to extend the two-year period in certain circumstances, and has recently issued guidance as to when this discretion will be exercised. Executors and beneficiaries who have exceeded the two years may now rely on the ‘safe harbour’ provided in this guidance, or alternatively they may apply for a private binding ruling.
Disposal after two years of death – safe harbour approach
The Australian Tax Office (ATO) has issued Practical Compliance Guideline PCG 2019/5 (the Guideline) which provides a safe harbour compliance approach that enables beneficiaries and executors to assume, where certain conditions are met, that the Commissioner had exercised the discretion to extend the two-year period for an additional period of up to 18 months. Effectively, this results in an exemption period of three and a half years.
The Guideline specifies particular circumstances which have caused delays for which the safe harbour can be relied on. These circumstances include where there is a delay due to a challenge to the Will or the ownership of the property, or where there is a delay in the disposal of the property due to a life interest provided for in the Will. Other qualifying circumstances include where settlement is delayed and falls through due to reasons outside of the control of the beneficiary or executor, or where the complexity of the estate delays the completion of administration of the estate.
In order to rely on the safe harbour, the executor or beneficiary must have spent a period greater than 12 months addressing the particular circumstances that caused the delay. It must also be demonstrated that the property was listed for sale as soon as possible after those circumstances were resolved, with settlement occurring within 12 months of listing.
The Guideline states that the following delays will not qualify for the safe harbour:
- 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; or
- Unexplained periods of inactivity by the executor in attending the estate’s administration.
The ATO places most importance on the cause of the delay, rather than the length of the delay. For instance, the ATO will not allow any extension where there is a very short delay beyond the two years, where no relevant circumstances are present. Likewise, a lengthy delay will not prevent the ATO from allowing a longer period.
The ATO will be undertaking compliance checks to ensure that taxpayers have correctly self-assessed their eligibility for the safe harbour and that the additional period is no longer than 18 months. Where beneficiaries or executors seek to rely on the safe harbour, it is crucial to retain documentation evidencing the causes of the delay.
Our recommendations
If you are an executor or beneficiary of a deceased estate and are concerned as to your possible tax exposure upon a property sale, please contact us. We can assist you in ascertaining whether you are entitled to rely on the safe harbour, if the sale of the property will occur two years after the deceased’s death.
If the safe harbour does not apply to your circumstances, we can apply for a private binding ruling requesting that the Commissioner exercise discretion to extend the two-year period. The Guideline specifically notes that certain factors are relevant to the exercise of discretion, but are not relevant for the safe harbour. Such factors include the sensitivity of the beneficiary’s personal circumstances and the degree of difficulty in locating all beneficiaries required to prove the Will. If these factors are relevant to you, we strongly recommend that you contact us so that we can commence to prepare a private ruling application.
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