How to avoid CGT on deceased estate property

The CGT implications on the disposal of a property from a deceased estate depend on several factors, including the time from date of death to settlement or transfer to a beneficiary, the date the property was acquired, and whether the property served as the main residence for the deceased.

Scenario A – Pre-CGT dwelling

The trustee of a deceased estate (the legal personal representative, or LPR) or a beneficiary of a deceased estate can disregard a capital gain or loss from a dwelling acquired by the deceased prior to 20 September 1985 (pre-CGT) if either of the following conditions apply:

1. The LPR or beneficiary disposes of their ownership interest in the dwelling within two years of the deceased’s death (or such time as the Commissioner of Taxation may determine). In the context of a sale, it is vital that if a dwelling is sold under a contract, settlement of that contract must have occurred within two years of the deceased’s death. It is not enough for the LPR or beneficiary to sign a contract of sale within two years.
2. If the dwelling was not disposed of within two years, a full main residence exemption may still apply if the deceased’s dwelling was (from the date of the deceased’s death until disposal) the main residence of:

• The deceased’s spouse.
• An individual who had a right to occupy the dwelling pursuant to the deceased’s will.
• An individual to whom the ownership interest passed to as a beneficiary safe harbour.

If the dwelling is not disposed of within two years due to exceptional circumstances, relief may be granted by the Commissioner to extend the two-year timeframe in the 2008-09 income year and later years. The ATO has published a Practical Compliance Guide 2019/5 outlining factors to be considered when deciding whether to exercise this discretion.

The LPR or beneficiary can rely on the PCG and assume that an extension of up to 18 months will be automatically granted (without needing to apply for an extension) if the following conditions are met:

1. During the first two years after the deceased's death, more than 12 months were spent addressing one or more of the following circumstances:

• Challenges to the ownership of the dwelling or the will.
• A life interest or other equitable interest given in the will delayed the disposal of the dwelling.
• The complexity of the deceased estate delayed completion of its administration.
• Settlement of the contract of sale of the dwelling was delayed or fell through for reasons outside of the control of the LPR or beneficiary.
• Restrictions on real estate activities imposed by a government authority in response to COVID-19 contributed to a delay.

2. The dwelling was listed for sale as soon as practically possible after none of the circumstances above were an impediment, and the sale was actively managed to completion
3. The sale was completed (settled) within 12 months of the dwelling being listed for sale.
4. None of the following materially contributed to the delay of the sale:

• Waiting for the dwelling market to pick up before selling the dwelling.
• Delay due to refurbishment of the dwelling to improve the sale price.
• Inconvenience on the part of the trustee or beneficiary to organise the sale.
• Unexplained periods of inactivity by the executor in attending to the administration of the estate.

If the LPR or beneficiary is intending to rely on the safe harbour, they should nevertheless maintain all records necessary to support their claim in the event they are chosen for an ATO compliance check.

Scenario B - Post-CGT dwelling

A full main residence exemption will only be applied to dwellings acquired by the deceased on, or after, 20 September 1985 if one of the two circumstances apply:

1. For dwellings acquired by the LPR or the beneficiary on or before 20 August 1996:

• The dwelling must have been the main residence of the deceased throughout the entire ownership period.
• The dwelling must not have been income producing.
• Condition 2 in Scenario A is met.

2. For dwellings acquired by the LPR or the beneficiary after 20 August 1996:

• The dwelling must have been the deceased’s main residence.
• The dwelling must not have been income producing.
• Condition 1 or 2 in Scenario A is met.

Foreign residents

It is also important to note whether the deceased was an excluded foreign resident at the date of their death.

An excluded foreign resident is defined as a foreign resident for a continuous period of more than six years and is unable to access the CGT main residence exemption.

On 9 May 2017, the government announced it would exclude foreign residents from accessing the CGT main residence exemption, but implemented transitional rules for properties purchased prior to 9 May 2017 and sold on or before 30 June 2020, to claim the existing exemption.

Under the new legislation, if at the date of death the deceased had been an excluded foreign resident, none of the CGT main residence concessions discussed earlier would apply. This rule also applies regardless of whether the deceased previously held that dwelling as their main residence for a period of time as no apportionment would be granted to the LPR or beneficiary for that period where the deceased used the property as their main residence.

Suzanne Jones is a partner and head of estate planning at Coote Family Lawyers.