Benjamin Franklin famously wrote that “nothing can be said to be certain, except death and taxes”. This always has been (and always will be) true, and unfortunately, the two are not mutually exclusive. There are strict tax rules that apply when a deceased person’s family home is disposed of which you should be aware of, whether you are an executor or administrator, or beneficiary of an estate, or whether you are thinking about leaving specific assets to specific people in your Will.
More often than not, the administration of a deceased estate will involve the executor selling the deceased’s home or transferring the deceased’s home to a beneficiary of the estate. As with all transfers of dutiable property, these transfers can attract transfer duty (previously called stamp duty) and Capital Gains Tax (CGT) unless the Office of State Revenue (OSR) has determined that an exemption applies.
Capital Gains Tax and the Deceased’s primary residence
Provided that the executor or beneficiary dispose of the property within two years of the deceased’s death, OSR exempts the disposal from any CGT. If the disposal occurs after the 2-year time period, then CGT will apply. At its discretion, OSR may extend the 2-year time period.
In August 2018, OSR published a draft Practical Compliance Guideline (“PCG 2018/D6”) outlining in what scenarios OSR is likely to grant an extension on the 2-year time period. Generally speaking, OSR will weigh up all of the circumstances, and if circumstances exist that are beyond the control of the executor or beneficiary which have prevented the sale of the property within the 2-year time period, then OSR will generally extend the time period and exempt the disposal from CGT.
According to PCG 2018/D6, if at least 12 months of the 2-year time period is spent addressing certain matters, then the ‘safe harbour’ provisions may apply. If the safe harbour provisions do apply, then an executor or beneficiary is free to manage their tax affairs as if OSR had granted an extension to the time period. The matters which an executor or beneficiary might address which would lead to the safe harbour provisions applying include but are not limited to: –
- a challenge to the ownership of the property or to the deceased’s Will;
- a life or other equitable interest in the property delays the disposal of the property;
- the complexity of the deceased estate delays the finalisation of the estate; or
- the settlement of the contract for sale falls through for reasons outside of the applicant’s control.
In order for the safe harbour provisions to apply, the following criteria must also be met: –
- The property must be listed for sale as soon as practically possible after the circumstances causing the delay are resolved (and the sale was actively managed to completion);
- The sale must be completed (and settled) within 6 months of the property being listed for sale;
- Any adverse factors working against the applicant are immaterial to the delay; and
- The extension of time needed is no more than an additional 12 months.
OSR will look favourably on an application to extend the time period where the safe harbour provisions apply, however, given the current property market, it is important to note that OSR will not look favourably on those who delay disposing of a property because they are waiting for the property market to pick up, refurbishing the property in an attempt to get a better sale price or because it is inconvenient to organise the sale. Unexplained periods of inactivity will also count against an applicant.
Transfer (Stamp) Duty
Transfer Duty is a tax that is payable by the buyer or receiver of an interest. OSR has identified a number of scenarios that will only attract nominal Transfer Duty (currently $20.00) when property is being transferred from a deceased estate to a beneficiary.
For example, if a property is transferred as a specific gift pursuant to the terms of the deceased’s Will or as residue of the estate pursuant to the Will (provided the value transferred doesn’t exceed the value of the beneficiary’s entitlement), then only nominal Transfer Duty will be chargeable on the transfer.
Avoiding Transfer Duty becomes much more difficult where the deceased did not make a valid will. Distributions and transfers of property to beneficiaries under the Administration Act 1903 are treated by OSR in a similar way as distributions of residue under a will. Nominal Duty will only be applied where the value transferred does not exceed the value of the beneficiary’s entitlement according to the Act. Very often, this is not the case, and beneficiaries find that full duty is payable on the transfer, or at least on the value of the transfer that exceeds the value of their entitlement.
The payment of Transfer Duty is something that any experienced Estates lawyer will consider in your estate planning and the drafting of your Will. Every person (especially those who hold real estate) should take advice and make a tax effective will to minimise CGT and Transfer Duty implications.
Estate planning traps
It is not unusual to see people make Wills whereby they give one piece of property, say the family home, to one child, and another property, say a holiday home or investment property, to another child, especially if they have similar values.
This is a common pitfall and the Will maker should be cautious here – even if the two properties are valued identically, the family home may well be CGT free (as above, being the deceased’s primary residence) but the investment property may have a large capital gain attached to it.
If the Will does not cater for that CGT issue, there may be a dispute about whether the estate as a whole pays the CGT, or if the child who was gifted the investment property has to pay it themselves. The results may be entirely unanticipated inequality between the two beneficiaries, when the intention was to make them equal.
The same may also apply to share portfolios, as shareholdings might also have CGT payable on their transfer.
As with all things, the outcomes vary from person to person, so if you have any queries relating to any issues above, please contact us to discuss.