CGT ‘Safe Harbour’ for Selling an Inherited Property
The sale of your main residence (home) is generally exempt from Capital Gains Tax (CGT). If you pass away, your main residence may be sold by your executors or beneficiaries.
This article outlines the main residence exemption for deceased estates and the ‘safe harbour’ for executors and beneficiaries to access the exemption where certain factors delay the sale.
Two year time limit
As a general rule, the sale of a deceased’s home will not attract CGT if it is completed within two years of the death. This is the deadline for final settlement to occur.
Commissioner’s discretion to extend the two year limit
It may not be viable for executors or beneficiaries to complete the sale within two years of the death. For example, the estate may be placed on hold due to litigation.
The Commissioner of Taxation has the discretion to extend the two year time-frame where factors outside the control of the executors or beneficiaries substantially delay the sale.
Until recently, it was necessary to apply to the Commissioner for the discretion to be exercised.
The Australian Taxation Office (ATO) has released a Practical Compliance Guideline (PCG 2019/5) which outlines:
1. the factors the ATO will consider in deciding whether to exercise the discretion; and
2. a ‘safe harbour’ compliance approach allowing executors and beneficiaries to regard the discretion as having been exercised if certain criteria are met.
‘Safe harbour’ conditions
Each of the below conditions must be met for executors or beneficiaries to treat the discretion as being exercised in their favour:
1. During the first two years post-death, more than 12 months was spent addressing at least one of the following issues:
a. the Will or ownership of the property was challenged;
b. the Will created a life interest or other equitable interest which delayed the sale of property;
c. the estate administration was delayed due to the complexity of the estate; or
d. the property settlement was delayed or failed due to factors outside the executor or beneficiary’s control.
2. the property was listed for sale as soon as practicable once these issues were resolved and the sale was actively managed to settlement;
3. settlement occurred within 12 months of the listing; and
4. none of the following factors caused material delay to the sale:
a. waiting for the property market to improve;
b. refurbishing the property to maximise the sale price;
c. inconvenience caused to the executor or beneficiary in arranging the sale; or
d. unexplained periods of inactivity by the executor or beneficiary in administering the estate.
What if the ‘safe harbour’ conditions are not met?
Where the ‘safe harbour’ criteria are not fully satisfied, executors and beneficiaries may apply to the Commissioner to exercise the discretion by way of a private ruling.
The Commissioner will look favourably upon allowing a longer period where any of the ‘safe harbour’ criteria (at paragraphs 1 to 3 above) delayed the sale of property.
Factors that would weigh against the Commissioner exercising the discretion include those listed at paragraph 4 above.
In reviewing an application, the Commissioner may also consider:
1. the sensitivity of the executor or beneficiary’s personal circumstances and that of the other surviving relatives; and
2. any difficulty in locating the beneficiaries required to prove the Will.
The Commissioner will place greater weight on the circumstances causing delay (rather than the length of the delay).
Lessons for executors and beneficiaries
Executors and beneficiaries seeking to rely on the ‘safe harbour’ must keep detailed records of the sale (including the circumstances which caused delay).
It is critical that executors and beneficiaries obtain expert legal and financial advice when selling a deceased’s main residence and administering an estate. This will ensure the beneficiaries’ interests are protected and the estate receives beneficial tax treatment as far as possible.
If you require assistance with the sale of an estate property or any other estate matter, please contact our Wills & Estates team on 9550 4600.