As an executor or beneficiary of an estate, it is important to be aware of the capital gains tax (CGT) consequences of selling an estate property on which there is a dwelling.
A dwelling is anything that is used for residential accommodation.
Where an executor of an estate sells the deceased’s main residence within two years of the deceased’s date of death, any capital gain or loss will be disregarded, provided the property was not used to produce income.
Importantly, where the main residence is located on acreage, the CGT exemption applies to a maximum of two hectares of land around the dwelling.
Capital gains and losses are also disregarded when an executor sells a dwelling of the deceased that was acquired before 20 September 1985, within two years from the deceased’s date of death.
The Commissioner of Taxation has always had the discretion to extend this two year period in certain circumstances upon application to Australian Taxation Office (‘ATO’) by the executor.
On 27 June 2019, the Commissioner introduced Practical Compliance Guideline PCG 2019/5 which provides the executor with a safe harbour where the deceased’s property cannot be sold and settled within 2 years of the deceased’s death.
The safe harbour allows the executor an additional 18 months for settlement of the property to take place, where all of the following conditions are met:
1. during the first 2 years after the deceased’s death, more than 12 months was spent addressing:
(a) a challenge to ownership of the property or the Will;
(b) a life interest in the Will;
(c) complexity that delays the completion of the estate administration; or
(d) a delay in settlement or termination of a contract for reasons outside the executor’s control.
2. the property is listed for sale as soon as possible after the above issues are resolved;
3. the sale settles within 12 months of being listed for sale;
4. none of the following matters delayed the disposal of the property:
(a) a wait for the property market to pick up;
(b) a delay due to refurbishment of the house;
(c) an inconvenience to the executor in organising the sale; or
(d) an unexplained period of inactivity.
When executors rely on this safe harbour it is important they keep details notes and records in case they are chosen for an ATO compliance check.
It should be noted that the Commissioner still has discretion to extend the two year period in other circumstances upon application to the ATO.