Inheriting a home, or at least a legal interest in one, could be the largest windfall gain that many Australians ever experience – a gain which can be maximised by the CGT exemption under the “sale within two years” rule in s 118-195(1) of the ITAA 1997. In this respect, the new ATO Draft Practical Compliance Guideline PCG 2018/D6, which allows a taxpayer to “self-assess” if the Commissioner’s discretion should be exercised to allow an extension of this two year period, is of some significance.
Key feature – safe harbour rules
The key feature of PCG 2018/D6 is that it outlines “safe harbour” rules that will enable the taxpayer (ie an LPR or a beneficiary, as the case may be) to “self-assess” whether the Commissioner would favourably exercise the discretion.
There are five crucial safe-harbour rules, and all five of which must be satisfied. They are as follows:
1/. During the two-year period after the home is acquired by the taxpayer, more than 12 months must have been spent in addressing any one or more of the following matters that has otherwise delayed the sale or disposal of the dwelling within the required two-year period:
- the ownership of the home, or the will itself, is challenged;
- a life or equitable interest given over the home under the will delays its sale or disposal;
- the complexity of the deceased estate delays the completion of its administration; or
- settlement of the sale of the home is delayed or falls through for reasons outside of the taxpayer’s control.
(These are the same factors that the Commissioner will consider in deciding whether to exercise the discretion where an application is made to the ATO to extend the 2 year period.)
2/. The home must be listed and actively managed for sale as soon as practically possible after such matters have been resolved.
3/. The sale of the home must be “settled” within six months of its listing.
4/. The delay in the sale or disposal of the home cannot be due to any of the following matters:
- the taxpayer waiting for the property market to pick up;
- refurbishment of the home to improve its sale price;
- “inconvenience” on the part of the LPR or beneficiary to organise the sale; or
- unexplained periods of inactivity by the LPR in attending to the administration of the estate.
5/. The taxpayer must not require more than a 12-month extension to self-assess an extension. If a longer period is required, a formal application must be made to the Commissioner.
Of course, when the PCG 2018/D6 is finalised, it may well contain major changes from the draft – in which case nothing will substitute for a thorough reading of the final text itself.
It is also necessary to note several other things about the operation of the sale within two years rule.
Firstly, the rule also applies to any “dwelling” that was acquired by the deceased prior to 20 September 1985, regardless of how it was used by the deceased. On the other hand, an inherited post-CGT home must meet the requirement of being the deceased’s “main residence at their date of death and not then being used to produce assessable income”. But in the common case where the deceased resided in a nursing home before their death, the absence concession can be used to meet the requirement of the home “being the deceased’s main residence at their date of death”.
Secondly, even if a sale or disposal is not realised within the required two years (or such further time as allowed) all is not lost — the taxpayer who inherits the home will still get a “cost base” equal to the home’s market value at the deceased’s date of death to calculate any CGT liability (see s 128-15(4), Item 3). And with the benefit of the 50% CGT discount (and the CGT small business concessions, if relevant), any such liability may be quite minimal.
Thirdly, the CGT exemption for sale within two years does not just apply to an inherited home per se. It also applies to an inherited “interest” in a home. This means that a person who, say, inherits 50% of a home may well obtain the exemption while the beneficiary in respect of the other 50% interest may not. This typically occurs where a 50% joint owner sells their interest to the other 50% owner within two years, but the other party does not dispose of their inherited interested within that time.
Fourthly, an LPR or a beneficiary can also acquire a full CGT exemption under s 118-195 if, from the time of the deceased’s death until its sale etc, it was the main residence of a surviving spouse, a person with a right to occupy the dwelling or the beneficiary who inherits it. And like the sale within two-year rule, it requires that the inherited home was either a pre-CGT dwelling of the deceased or their main residence at their date of death and was not then being used for producing assessable.
Finally, if a full CGT exemption is not available under the rules in s 118-195, then the rules in s 118-200 automatically apply to work out the amount of any partial CGT exemption.