On 22 August 2018, the ATO issued Draft Practical Compliance Guideline PCG 2018/D6 (Draft Guideline) on the Commissioner’s discretion to extend the two year period for disposing of a dwelling inherited from a deceased estate in order to qualify for the CGT main residence exemption.
If an individual disposes of an interest in a dwelling that:
- it originally received as a beneficiary or trustee of the deceased’s estate
- it disposes of it within two years of the deceased’s death
- the dwelling was the main residence of the deceased and
- any capital gain or loss made on the disposal is disregarded.
The Commissioner, at his discretion, can allow a longer period than 2 years. The Draft Guideline sets out the factors the Commissioner considers in deciding whether to exercise the discretion. It also outlines a safe harbour compliance approach that allows taxpayers to manage their tax affairs as though the Commissioner has exercised the discretion for a period not exceeding 12 months.
Generally, the Commissioner will allow a longer period where the dwelling could not be sold within the two year period mentioned above due to circumstances outside the individual’s control that existed for a significant portion of the first two years. Ultimately, each decision will be decided on a case-by-case basis.
Section 118-195 of the Income Tax Assessment Act 1936 disregards certain capital gains and capital losses arising from a CGT event happening to a dwelling that was a deceased person’s main residence and not being used to produce assessable income just before they died or was acquired by the deceased before 20 September 1985.
The executor or a beneficiary (Taxpayer) of the deceased estate must satisfy the following five conditions to qualify for the additional 12 month safe harbour:
- During the initial two year period after the interest in the dwelling passes to the Taxpayer, over 12 months are spent addressing one or more of the following circumstances:
- the ownership of the dwelling or a challenge to the will
- a life or other equitable interest given in the will which delays the disposal
- administration of the estate which is delayed due to the complexity of the deceased estate or
- settlement of the contract of sale of the dwelling which is delayed or falls through for reasons outside of the Taxpayer’s control.
- The dwelling must be listed for sale as soon as practically possible after the above circumstances are resolved and the sale is actively managed to completion.
- The sale must be settled within six months of the listing.
- The following factors, which are adverse to the exercise of the Commissioner’s discretion, are immaterial to the delay in disposing of the Taxpayer’s interest in the dwelling:
- waiting for the property market to pick up
- delays due to refurbishment to improve the sale price
- inconvenience on the part of the Taxpayer to organise the sale or
- unexplained periods of inactivity by the executor in attending to the administration of the estate.
- The Taxpayer needs no more than a 12 month extension to the two year period for disposal.
If a Taxpayer decides to use the safe harbour but is subsequently subject to an ATO compliance check, the ATO will seek to ensure the Taxpayer satisfies the above factors, including checking the additional period is no longer than 12 months. It will be important for the Taxpayer to keep records to support a position that the above conditions are satisfied. The ATO will not make a determination on whether the Commissioner’s discretion would have been exercised.