Practical Compliance Guideline PCG 2019/5 updated for COVID
Practical Compliance Guideline PCG 2019/5 has recently been updated by the ATO to explicitly include the impact of COVID-19. The guideline outlines how the CGT main residence exemption may apply in cases where a dwelling is sold, either by an individual beneficiary or by the trustee of a deceased estate. PCG 2019/5 now includes specific examples to illustrate the complexity in claiming the safe harbour within the background of COVID-19 restrictions and economic effects.
The ATO has recently updated its practical compliance guideline on how the CGT main residence exemption may apply in cases where a dwelling is disposed of by either an individual beneficiary or by the trustee of a deceased estate. Generally, CGT on the disposal of an ownership interest (as either an individual beneficiary or as the trustee of a deceased estate) within 2 years of the deceased’s death can be disregarded.
Commissioner's discretion to extend the 2 year period
For disposals that take longer than 2 years, the Commissioner has the discretion to extend this 2 year period to allow the CGT concessional treatment. Practical Compliance Guideline PCG 2019/5 outlines a safe harbour compliance approach that allows individual beneficiaries and trustees of the deceased estate to manage their tax affairs as if the Commissioner had exercised the discretion to allow for a longer period than 2 years in which to sell a property that was the deceased’s main residence.
Safe Harbour
To qualify for the safe harbour, the following conditions must be satisfied:
- During the first 2 years after the deceased’s death, more than 12 months was spent addressing one or more of the following circumstances:
- ownership of the dwelling, or the will, is challenged;
- a life tenancy 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 beyond the control of the beneficiary or trustee; or
- restrictions on real estate activities imposed by a government authority in response to the COVID-19 pandemic.
- The dwelling was listed for sale as soon as practically possible after the above circumstances were resolved, and the sale was actively managed to completion.
- The sale was completed (settled) within 12 months of the dwelling being listed for sale.
- If any of the following conditions applied, they were immaterial to the delay in disposing of the interest in the dwelling:
- waiting for the property market to pick up before selling the dwelling;
- waiting for refurbishment of the dwelling to improve the sale price;
- inconvenience encountered by the trustee or the beneficiary in organising the sale of the dwelling; or
- unexplained periods of inactivity by the executor in attending to the administration of the estate.
- The longer time period for which the discretion is otherwise needed to be exercised is no more than 18 months.
The updated PCG now explicitly considers the effect that COVID-19 has had and contains examples to illustrate the complexity in claiming safe harbour.
In the event that safe harbour conditions cannot be met, the PCG also outlines factors that the Commissioner may consider when weighing up whether or not to exercise his discretion. These include the personal circumstances of the surviving relatives, the degree of difficulty in locating all beneficiaries required to prove the will, any period the dwelling was used to produce assessable income, and the length of time an ownership interest was held in the dwelling.
It is important to note that the ATO considers the circumstances that have caused the delay in disposal to be more important than the length of the delay. Any potential capital gain or loss is also not considered to be relevant to the exercise of discretion.
Need help?
If you need help as a beneficiary or trustee of a deceased estate to ensure that the disposal of a dwelling meets the CGT main residence exemption, we have the expertise to help you navigate this complex area. Whether applying the safe harbour conditions or seeking the Commissioner’s discretion, we can assist at every stage.
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.