Deceased Estates: Can I sell two years later and not pay Capital Gains Tax?

If you are the executor or beneficiary of an estate and you are struggling to sell the deceased’s main residence for reasons out of your control, then the Australian Taxation Office (“ATO”) Practical Compliance Guideline PCG 2019/5 (“Guideline”) might be of interest to you.

The ATO has recently released Practical Compliance Guideline PCG 2019/5 which sets out a “safe harbour” for executors and beneficiaries if the deceased’s main residence or pre-capital gains tax dwelling is sold more than two years after the deceased’s death.

Background

Generally, capital gains tax (“CGT”) is not payable in relation to the sale of a dwelling that was the deceased’s main residence (and not used to produce assessable income at the time of the deceased’s death) or a dwelling that was acquired by the deceased before 20 September 1985 if it is sold by the executor or beneficiary of the dwelling within two years of the deceased’s death. It is important to keep in mind that ‘sold’ means that ownership of the dwelling must have changed within two years; the date of settlement or completion of the sale is relevant, not the date of the contract for sale.

ATO Discretion and Guideline

Under the CGT rules, the Commissioner of Taxation has a discretion to extend the two-year period during which the executor or beneficiary must sell the main residence or the pre-CGT dwelling. Under the Guideline, it is no longer necessary to apply to the Commissioner for the discretion to be exercised. If the executor or beneficiary has complied with the safe harbour compliance rules set out in the Guideline, the executor or beneficiary can manage their tax affairs as if the Commissioner had exercised the discretion to extend the two-year period by up to 18 months.

Safe Harbour Rule

To rely on the safe harbour rule, you must meet all of the following conditions:

1. During the first two years after the deceased’s death, more than 12 months was spent addressing at least one of the following:
   • a challenge to the ownership of the dwelling; or
   • a challenge to the deceased’s will; or
   • a life or other equitable interest given in the will delays the sale of the dwelling; or
   • delays caused by the complexity of the deceased estate; or
   • settlement of the contract falls through or is delayed for reasons out of your control.
2. The dwelling was listed for sale as soon as practically possible after the circumstances preventing the sale were resolved and the sale was then actively managed until settlement.
3. The sale completed within 12 months of the dwelling being listed for sale.
4. None of the following were material reasons for the delay in selling the dwelling:
   • 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.
5. The additional period in which the sale occurs is no longer than 18 months after the initial two-year period.

Record Keeping

As it is possible that the ATO will conduct a compliance check, you should maintain records to show the relevant conditions were met.

What happens if the Safe Harbour Rules are not met?

If the circumstances of the case fall outside the safe harbour rule you can apply for a private ruling for the Commissioner to exercise the discretion to extend the two-year period. This will involve the Commissioner considering all the facts and circumstances of the case, including those that may be in favour of or against allowing an extension.

Other relevant factors the Commissioner may take into account when exercising the discretion include:

• the sensitivity of your personal circumstances and/or of other surviving relatives of the deceased;
• the degree of difficulty in locating all beneficiaries required to prove the will;
• any period the dwelling was used to produce assessable income; and
• the length of time you held the ownership interest in the dwelling.

The ATO stresses that the circumstances that caused the delay beyond the two-year period are more important than the length of the delay. The ATO will not grant any extension of time if there are no relevant favourable factors present that led to the delay.

If you are an executor or beneficiary and you are unsure whether you comply with the safe harbour rule, please contact us. Our experienced Wills & Estate Law Team will be able to assist you with this or any other question.