The Australian Taxation Office (ATO) recently issued Practical Compliance Guideline 2019/5 (PCG 2019/5) relating to the sale of a deceased’s main reside nce (the Property), and when a capital gain arising from the sale may or may not be tax-free.
Under the tax law, if the sale of the Property is settled within two years of the deceased’s date of death, the capital gain from the sale may be tax-free. However, if the sale does not occur within two years, the capital from the sale may be taxed at marginal tax rates.
There may be practical considerations which prevent the Property from being sold within two years of the deceased’s date of death, including:
- Ownership of the Property or the will being challenged;
- The Property being subject to other legal or equitable interests (such as a life interest); or
- The sale falling through because the purchaser cannot settle and the Property must be placed back on the market.
The ATO has the power to extend the two year period in certain circumstances. Ordinarily, you must formally apply to the ATO for it to allow you further time to sell the Property on a tax-free basis. However, under PCG 2019/5, the ATO automatically extends the two year period by a further 18 months if certain conditions are met, and in such a case, no formal application is required.
The following circumstance is an example of when the ATO may automatically extend the two year period by a further 18 months and any capital gain from the sale of the Property may be tax-free:
Mr Harrison acquired a dwelling before 20 September 1985, which was his main residence until he died on 3 October 2013. Mr Harrison’s will stated that the dwelling was to pass (in equal shares) to his two adult children from his first marriage. The will also made separate provisions for both his first and second wives.
Both the first and second wives commenced legal proceedings to challenge the terms of the will. The children received legal advice that they could not dispose of the dwelling until those legal challenges had been resolved. Negotiations took place between all beneficiaries and a settlement was eventually reached, with Supreme Court orders handed down on 21 July 2015. The dwelling was to be disposed of and the proceeds distributed between the beneficiaries in accordance with the order.
The dwelling was placed on the market on 1 September 2015 and sold, with settlement occurring on 16 November 2015.
The following circumstance is an example of when the ATO may not automatically extend the two year period by a further 18 months and any capital gain from the sale of the property may not be tax-free:
Ms Kimono lived in her main residence until she died on 6 May 2013. Prior to her passing, her spouse moved into the property. Her will stated that the dwelling was to pass in equal shares to her three children.
After Ms Kimono’s death, her spouse continued to live in the property and the children commenced legal proceedings to remove Ms Kimono’s spouse from the property. The matter was settled on 8 July 2014.
After the matter was settled, the property remained vacant for 18 months while the children decided what to do with the property. The property was eventually put on the market in January 2016 and sold, with settlement occurring on 3 April 2016.
However, in this case, you may be able to formally apply to the ATO and seek their discretion to extend the two-year period of time to make any capital gain from the sale of the Property tax-free.
This article was written by Ari Schachna, Partner, James Den, Consultant and Vincent Licciardi, Senior Associate.