If you inherit a dwelling and later sell or are looking to sell it, you may be exempt from Capital Gains Tax (CGT); however, there are conditions that need to be taken into consideration.
Generally, a resident individual taxpayer is exempt from capital gain tax on disposal of a dwelling that is his/her main residence. This main residence exemption also applies to certain dwellings that are inherited from a deceased estate. A taxpayer may acquire a dwelling pursuant to a Will, which was the main residence of the deceased, either as a beneficiary or as a legal personal representative of the deceased estate. In these circumstances, special CGT rules determine how the main residence exemption applies on a disposal of the inherited dwelling.
Two-year time limit
If the inherited dwelling is disposed of within two years of the deceased’s date of death by an individual beneficiary or a trustee of a deceased estate, any capital gains are disregarded in relation to the dwelling that was the deceased’s main residence and not being used to produce assessable income just before the date of death, or was initially acquired by the deceased before 20 September 1985.
Commissioner’s discretion to extend the two-year requirement
Where the inherited dwelling could not be sold and settled within two years of the deceased’s death due to reasons beyond the taxpayer’s control, the taxpayer should be allowed a longer period for the exemption under a new safe harbour compliance approach, or on application for a private binding ruling to seek the Commissioner’s discretion to extend the two-year period.
The safe harbour guidelines in the Practical Compliance Guideline PCG 2019/5 allow a taxpayer to self-assess a longer extension beyond two years, the maximum extension is 18 months, as a result, under safe harbour approach, and the exemption period is three and a half years. To qualify for the safe harbour, all of the following conditions must be satisfied:-
- During the first two years after the deceased’s death, more than 12 months was spent addressing one or more of the following circumstances:-
- The ownership or the Will of the dwelling is challenged
- A life or other equitable interest given in the Will delays the disposal of the dwelling
- The complexity of the deceased estate delays the completion of administration of the estate
- Settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of the taxpayer’s control.
- The dwelling was listed for sale as soon as practically possible after the above circumstances were resolved
- The sale completed within 12 months of the dwelling being listed for sale
If any of the following circumstances were immaterial to the delay:
- Waiting for the property market to pick up before selling the dwelling
- Delay due to refurbishment of the house to improve the sale price
- Inconvenience on the part of the trustee or beneficiary to organise the sale of the house
- Unexplained periods of inactivity by the executor in attending to the administration of the estate
- The longer period for which the taxpayer would otherwise need the discretion to be exercised is no more than 18 months
If all of the above safe harbour conditions are satisfied, a taxpayer will be treated by the ATO as if the discretion to extend the two-year period had been exercised, accordingly, there will be no need to make a private binding ruling application to the ATO for the discretion to be exercised.
The onus is on the taxpayer to maintain all records necessary to support the claim that the taxpayer is eligible for the safe harbour.
The ATO focuses on the cause of the delay rather than the length of the delay in determining whether to exercise the discretion. The ATO will not allow a longer period if there are no relevant circumstances present.
Where taxpayer’s circumstances fall outside of the safe harbour but the taxpayer wants the Commissioner to consider exercising the discretion, the taxpayer should write to the ATO and request a private ruling.
If you have any queries regarding this, please contact us.