PCG 2019/5: Capital gains tax and deceased estates - the Commissioner's discretion to extend the 2-year period to dispose of dwellings acquired from a deceased estate
Document type: Final PCG
Status: Current
Date of issue: 27 June 2019

A1. This Guideline is about how the capital gains tax (CGT) main residence exemption may apply where you dispose of a dwelling that passed to you either as an individual beneficiary or trustee of a deceased estate. A2. All legislative references in this Guideline are to the Income Tax Assessment Act 1997. 1. Section 118-195 disregards capital gains and capital losses made from certain CGT events that happen in relation to a dwelling that: 2. If you dispose [3] of an ownership interest in a dwelling that passed to you as an individual beneficiary or as the trustee of the deceased's estate within 2 years of the deceased's death, any capital gain or loss you make on the disposal is disregarded. The Commissioner has the discretion to extend the 2-year period. 3. Generally, we will allow a longer period where the dwelling could not be sold and settled within 2 years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first 2 years. 4. This Guideline outlines a safe harbour compliance approach that allows you to manage your tax affairs as if we had exercised the discretion to allow you a longer period. 5. This Guideline also outlines the factors we will consider when deciding whether to exercise the discretion to extend the 2-year period. 6. You may be entitled to a partial exemption for any capital gain or loss made from the disposal of your ownership interest in a dwelling if section 118-195 does not apply. [4] This Guideline applies equally in relation to the Commissioner's discretion to extend the 2-year period for partial exemptions.



Intro: 8. If your circumstances satisfy the conditions listed in paragraph 11 of this Guideline, you can manage your tax affairs as if we had allowed you a period longer than 2 years. The Diagram 1 of this Guideline illustrates how the safe harbour can be relied on: Diagram 1: Guideline operation 9. If you choose to use this safe harbour and are subsequently chosen for an ATO compliance check, we will seek to ensure that you satisfy the conditions in paragraph 11 of this Guideline, including checking that the additional period is no longer than 18 months. We will not allocate compliance resources to determine whether or not we would have actually exercised the discretion where you have satisfied the conditions in paragraph 11 of this Guideline. 10. You should maintain all records necessary to support your claim that you are eligible for the safe harbour. | Safe harbour  conditions: 11. To qualify for the safe harbour, you must satisfy all of the following conditions: | Circumstances that took more than 12 months to resolve: 12. As per subparagraph 11(a) of this Guideline, one or more of the following circumstances must have taken more than 12 months to address: | Circumstances that cannot be material to delays in disposal: 13. In order to qualify for the safe harbour, none of the following circumstances can have been material to the delay in disposing of your interest per subparagraph 11(d) of this Guideline: | Extending the 2-year period  exercising the Commissioner's discretion: 14. In considering whether to extend the 2-year period, we weigh up all of the factors (both favourable and adverse) having regard to the facts and circumstances of the case. 14A. In practice, the facts we would consider in deciding whether to exercise the discretion would be fully understood only once the sale of the dwelling is completed. Ordinarily, it would be difficult for us to exercise our discretion prior to that time. 14B. Our general administrative approach is to exercise our discretion after the settlement of the sale of the dwelling. However, in some circumstances we may consider exercising our discretion prior to settlement of the sale of the dwelling where clarity is needed to resolve a matter. 15. Factors that would weigh in favour of us allowing a longer period include those listed in paragraph 12 of this Guideline. The absence of some or all of those favourable factors does not necessarily preclude us from allowing a longer period. 16. Factors that would weigh against us allowing a longer period include those listed in paragraph 13 of this Guideline. 17. Other factors that may be relevant to the exercise of our discretion (but are not relevant for the safe harbour) include but are not limited to: 18. How much weight we give to each factor will depend upon the circumstances of each particular case. The circumstances that caused the delay in disposing of the ownership interest are more important than the length of the delay. The amount of any potential capital gain or loss is not relevant to whether the discretion is exercised. 19. We will not allow a longer period for even a very short delay beyond 2 years if there are no relevant circumstances present. Likewise, a lengthy delay will not prevent us from allowing a longer period where relevant circumstances caused the delay and persisted for the overwhelming majority of the total period.

Example s: 20. Examples 1 to 10 of this Guideline illustrate how the safe harbour can apply in various situations and how we would approach exercising our discretion. | Example 1:  safe harbour  life tenancy 21. Mr Bishop acquires a dwelling before 20 September 1985. He dies on 22 March 2014 and his will grants a life tenancy to his wife. Title to the property remains in the hands of the trustee of the estate. Mr Bishop's 2 adult children from a previous marriage are the beneficiaries of his estate. 22. Mrs Bishop continues to live in the dwelling until she dies on 18 April 2017. 23. The trustee has the dwelling cleaned and placed on the market as soon as practically possible after Mrs Bishop dies. A contract for the sale of the property is signed on 11 July 2017 and settlement occurs on 14 August 2017. 24. Because the delay in disposing of the dwelling was caused by the life tenancy (circumstances described as a favourable factor) and the property was marketed and sold as soon as was practical after the death of Mrs Bishop, the trustee could rely on the safe harbour (provided no materially adverse factors were present). | Example 2:  no safe harbour  family member residing in dwelling 25. Ms Evans lives with Bevan (her adult son and full-time carer) in her main residence until she dies on 1 September 2013. Ms Evans acquires the dwelling after 20 September 1985 and it was not being used to produce assessable income when she died. 26. On the basis the dwelling would be sold and settled within a 2-year period, the trustee of the estate allows Bevan to continue to live in the dwelling until he finds full-time employment. Bevan is not given any right to occupy the house under Ms Evans' will. 27. In June 2016, Bevan obtains full-time employment and moves out of the dwelling. The trustee then sells the dwelling. 28. Because the delay in selling the dwelling was not caused by any of the circumstances described as favourable factors, the trustee cannot rely on the safe harbour. The decision to allow Bevan to reside in the dwelling was a matter of choice within the control of the trustee. | Example 3:  no safe harbour  storm damage and renovations 29. Mr Wong lives in a dwelling that is his main residence until he dies on 1 January 2016. Mr Wong acquired the dwelling before 20 September 1985. 30. On 14 July 2016, a severe storm damages the dwelling, which requires repairs before it can be advertised for sale. As well as completing repairs, the trustee also engages builders to undertake other significant renovations to improve the value of the dwelling before sale. Work is completed on 18 May 2017. 31. The dwelling is listed for sale on 26 June 2017 and actively managed until eventually sold. Settlement occurs on 17 January 2018. 32. Although the storm damage was outside of the control of the trustee and the property was sold shortly after the 2-year period, the trustee cannot rely on the safe harbour because the most significant factor in delaying the sale was the decision to renovate the dwelling, which was entirely within the control of the trustee. | Example 4:  no safe harbour  subdivision of land 33. Mrs Papageorgiou lives in her main residence until she dies on 1 June 2015. Mrs Papageorgiou acquired the dwelling after 20 September 1985 and it was not being used to produce assessable income when she died. 34. The trustee completes its administration of Mrs Papageorgiou's estate and the dwelling is owned by the beneficiaries of that estate (Mrs Papageorgiou's 4 adult children) as joint owners. 34A. The beneficiaries of Mrs Papageorgiou's estate decide to subdivide the property to increase the sale price. A plan is submitted to the council on 30 November 2015. On 1 July 2016, the council advises that the plan is not approved. 35. The beneficiaries appeal the decision on 22 July 2016 and attend a hearing on 12 October 2016. On 28 February 2017, a tribunal advises that a new subdivision application should be lodged with the council. A new application is submitted to the council on 24 March 2017, but by 1 June 2017 the council has not made a decision. 36. While the resolution of the subdivision application is beyond the control of the beneficiaries, they cannot rely on the safe harbour because the delay is due to the decision to subdivide, which is not necessary for the resolution of the estate or the disposal of the dwelling. | Example 5:  safe harbour  legal challenges 37. Mr Hawke acquires a dwelling before 20 September 1985, which is his main residence until he dies on 3 October 2013. Mr Hawke's will states that the dwelling is to pass (in equal shares) to his 2 adult children from his first marriage. The will also makes separate provisions for both his first and second wives. 38. Both the first and second wives commence legal proceedings to challenge the terms of the will. The children receive legal advice that they cannot dispose of the dwelling until those legal challenges have been resolved. Negotiations take place between all beneficiaries and a settlement is eventually reached, with Supreme Court orders handed down on 21 July 2015. In accordance with the order, the dwelling is to be disposed of and the proceeds distributed between the beneficiaries. 39. The dwelling is placed on the market on 1 September 2015 and sold, with settlement occurring on 16 November 2015. 40. The children could rely on the safe harbour because: | Example 6:  no safe harbour  inactivity 41. Ms Kahn lives in her main residence until she dies on 6 May 2013. Prior to her passing, her spouse moves into the dwelling. Her will states that the dwelling is to pass in equal shares to her 3 children. 42. After Ms Kahn's death, her spouse continues to live in the dwelling and the children commence legal proceedings to remove Ms Kahn's spouse from the property. The matter is settled on 8 July 2014. 43. After the matter is settled, the property remains vacant for 18 months while the children decide what to do with the property. The property is eventually put on the market in January 2016 and sold, with settlement occurring on 3 April 2016. 44. While there was a delay in disposing of the property due to the legal action to remove the deceased's spouse from the dwelling, the children cannot rely on the safe harbour because the dwelling was not listed for sale as soon as practically possible after those circumstances were resolved. | Example 7:  no safe harbour  serious illness of legal personal representative 45. Mr Hubbard acquires a dwelling before 20 September 1985. He lives in his main residence until he dies on 19 September 2014. Mr Hubbard's son, Richard, is the sole executor and beneficiary of Mr Hubbard's will. The house is the estate's only asset. 46. Shortly after probate is granted, Richard is diagnosed with a serious illness and spends a large period of time hospitalised. As soon as Richard's health improves, he cleans out the property and places the house on the market in January 2017, with settlement occurring on 2 April 2017. 47. Because the delay in selling the dwelling was not caused by any of the circumstances described as favourable factors, Richard could not rely on the safe harbour. However, if asked to exercise our discretion, we would take into account the fact that: | Example 8:  safe harbour  complexity of deceased estate 48. Mr and Mrs Harrison acquire their main residence after 20 September 1985. Mr Harrison dies in July 2008 and Mrs Harrison becomes the sole owner of the dwelling. Mrs Harrison dies on 29 February 2016 and is survived by her 2 daughters, Jane and Sally. The dwelling is not used to produce assessable income prior to Mrs Harrison's death. The daughters are unsure whether Mrs Harrison had a will. 49. Jane moves into the property without Sally's knowledge soon after Mrs Harrison dies. Sally wants to sell the dwelling and seeks Jane's agreement to sell. No agreement is reached and Jane becomes increasingly obstructive. 50. During January 2017, Sally engages solicitors in an attempt to resolve the issue. A number of court actions follow. During this period, Jane makes 2 unsuccessful attempts to have the title transferred into her name solely. Letters of administration are also issued to Sally and subsequently revoked during this period. In early 2018, Jane seeks to obtain finance to acquire Sally's interest in the property but is unable to do so. 51. In October 2018, on the basis that Mrs Harrison had no will, the Supreme Court rules that the property be sold. Jane is evicted and the property is sold, with settlement occurring on 14 May 2019. 52. Because the delay in disposing of the property was caused by the complexity of the estate (including uncertainty about the will and the multiple legal proceedings) and the property was listed and sold as soon as practicable after those issues were resolved, the sisters could rely on the safe harbour. | Example 9:  safe harbour  complexity of deceased estate 52A. Mr O'Connor acquires his main residence after 20 September 1985. The dwelling is not being used to produce assessable income when he dies in December 2015. Mr O'Connor's will provides that the dwelling is to pass to his only son David, in his capacity as the sole executor and beneficiary. The dwelling is never David's main residence. 52B. In administering the estate, the trustee discovers that the dwelling is intrinsically tied to Mr O'Connor's business as it was being used as security for the deceased's business debt. It takes an extended time for the trustee to untangle the deceased's financing and business arrangements in order to be able to sell the dwelling free from encumbrances. 52C. As soon as the dwelling is free from those encumbrances, it is listed for sale in February 2019 and sold with settlement occurring on 30 March 2019. 52D. Because the delay in disposing of the property was caused by the complexity of the estate (complex asset and liability position of the estate) and the property was listed and sold as soon as practicable after those issues were resolved, David can rely on the safe harbour. | Example 10:  safe harbour  more than one circumstance 52E. Mr Smith acquires his main residence after 20 September 1985. Mr Smith dies in April 2019. Mr Smith's will provides that the dwelling pass to his adult children. 52F. The children list the dwelling for sale in June 2019 but are immediately approached by a neighbour claiming that the driveway and part of the garage are occupying the neighbour's property. The children withdraw the dwelling from sale until the issue can be resolved. 52G. In April 2020, the issue with the neighbour is resolved. The dwelling is relisted for sale. 52H. In July 2020, COVID-19 restrictions come into effect, including a lockdown and limits on real estate viewings and auctions. There is very little interest in the dwelling during the lockdown and no offers are received. 52I. In December 2020, the lockdown is lifted and restrictions on real estate sales removed. In April 2021, the property sold, with settlement occurring in June 2021. 52J. Because the delay in disposing of the property was caused by the complexity in administration of the deceased estate (10 months) and the impact of COVID-19 measures (5 months), and they took longer than 12 months to resolve in total, the children can rely on the safe harbour. Further considerations 53. Where your circumstances fall outside of the safe harbour, but you want us to consider exercising our discretion, you should write to us directly  see Request discretionary extension to sell an inherited dwelling . 53A. Where an application for the discretion is made, and granted, it will apply regardless of whether the disposal of the ownership interest results in a capital gain or a capital loss. Where section 118-195 applies, the capital gain or capital loss is disregarded. How this may impact you in your circumstances should be considered before an application is made. 54. Where the safe harbour is not available and we do not exercise our discretion, your capital gain or capital loss will be calculated on the basis that the dwelling was acquired for its market value as at the date of the deceased's death. [6]



What this Guideline is about | This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach. | Date of effect: 7. This Guideline applies both before and after its date of issue. | Commissioner of Taxation 27 June 2019 | Revised to instruct applicants to submit a request for an exercise of our discretion in writing, rather than through the private ruling process. | Updated in line with current ATO style and accessibility requirements. | Reference to CGT was made that does not otherwise affect the content or principles of the Guideline. | Clarified that 'you' is an individual, whether you are a beneficiary or a trustee. | Added a diagram to illustrate how the safe harbour can be relied on. | Extended the application of the Guideline in response to COVID 19 pandemic. | Added clarity on our administrative approach when managing discretion requests. | Indicated that administration of the estate has been completed and the beneficiaries own the dwelling. | Added further clarity on complexity of deceased estates  deceased asset and liability position. | Provided example on COVID-19 pandemic impact. | Moved a footnote to a stand-alone paragraph with a view to assisting applicants to consider their circumstances before lodging a discretion request. | Multiple minor content and style updates that do not otherwise affect the principles of the Guideline. | Previously released in draft format as PCG 2018/D6

Legislative references: ITAA 1997 118-145 ITAA 1997 118-190 ITAA 1997 118-195 ITAA 1997 118-195(2) ITAA 1997 118-200 ITAA 1997 128-15(4)
Other references: Request discretionary extension to sell an inherited dwelling