The Australian Taxation Office (ATO) has provided useful guidance and ‘safe harbours’ for when the executors or beneficiaries of a deceased estate can access the Capital Gains Tax (CGT) main residence exemption for a property that was the deceased’s main residence at the time of their death.
Sales within 2 years of death
Ordinarily, the CGT main residence exemption is available on a disposal of the deceased’s main residence by the executors or estate beneficiaries provided they ceased to own the property within 2 years of the date of death.
Crucially, the requirement that ownership must cease within 2 years means that, in the context of a sale of the property, it is not enough for the executors or beneficiaries to have signed a contract of sale within 2 years. Instead, settlement of the contract must have occurred within 2 years. Given many purchasers, or their banks, will require a 90 day settlement period, executors and beneficiaries need to be acting in a timely manner in order to ensure the 2-year timeframe is satisfied.
Commissioner’s discretion beyond the 2-year limit
The CGT rules provide the Commissioner of Taxation with a discretion to extend the 2-year timeframe.
In recognition of this discretion, the ATO has released Practical Compliance Guideline PCG 2019/5EC outlining when they will generally allow a longer period and also providing a safe harbour compliance approach under which executors and beneficiaries can self-assess the discretion as having being exercised.
Taxpayers can treat the Commissioner’s discretion as having been favourably exercised provided each of the following conditions are met:
- During the 2-year post-death period, more than 12 months was spent addressing one or more of the following circumstances:
- ownership of the property or the will was challenged;
- a life or other equitable interest created by the will delayed disposal of the property;
- delays arose in completing the administration of the estate caused by the complexity of the estate; or
- settlement of the sale was delayed or fell through due to reasons outside the executor’s or beneficiary’s control.
- The dwelling was listed for sale as soon as practicable after the relevant circumstances were resolved and the sale was actively managed to settlement.
- The sale settled within 12 months of listing.
- The following circumstances were immaterial to the delay:
- waiting for the property market to improve;
- delays due to refurbishment to improve the sale price;
- inconvenience in arranging the sale; or
- unexplained periods of inactivity by the executor in administering the estate.
- The additional period for which the discretion is needed does not exceed 18 months.
Taxpayers should maintain records to support their claim that they are eligible for the safe harbour.
This safe harbour will be especially beneficial in instances where the estate is caught up in a claim for further provision under Part IV of the Administration and Probate Act, or there are concerns regarding the validity of a Will (given these Court proceedings often take more than 12 months to resolve).
When will discretion be favourably exercised?
Taxpayers who do not meet the requirements for the safe harbour may still request the Commissioner exercise his discretion in the form of a private binding ruling application.
As a general rule, the ATO will exercise the discretion to allow longer than 2 years to cease owning the property where:
- it could not be sold and settled within 2 years due to reasons beyond the executor’s or beneficiary’s control; and
- those reasons existed for a significant part of the 2 years.
The ATO will take into account all the surrounding facts and circumstances.
Examples of favourable facts and circumstances include those listed above at 1. Additional favourable facts may include:
- the sensitivity of personal circumstances of surviving relatives; and
- difficulties in locating beneficiaries to prove the will.
Unfavourable factors include those listed above at 4.
Importantly, it is the cause of the delay rather than the period of the delay that the ATO will focus on in deciding whether to exercise the discretion. For instance, even a very short delay beyond the 2-year limit will not lead to a favourable discretion decision in the absence of any of the relevant circumstances. Conversely, an extended delay will not, of itself, prevent a favourable decision.