The role of an Executor is vitally important to the proper administration of a deceased estate. Executors who do not treat this position with sufficient respect, and neglect to perform their statutory duties, can face consequences at law.
In Australia, the law generally allows Beneficiaries, who are aggrieved by an Executor’s conduct, to make an application to the Court for appropriate orders. The Court may make any orders it thinks fit, including an order for damages to compensate the deceased estate (and the Beneficiaries) for the loss caused by the Executor’s actions. The Court can also order the Executor to pay interest on any sums of money which have been in their hands, as well as the costs of the aggrieved Beneficiary’s application.
Accordingly, if you are an Executor, it is essential that you understand your duties and responsibilities when administering a deceased estate. In this article, we tackle a particular facet of those responsibilities, being timeframes for the disposal of real property.
CGT & Estate Property
Generally, according to the Commissioner of Taxation, capital gains tax (“CGT”) is payable in relation to the sale of a dwelling that was the deceased’s main residence, provided it is sold within two years of their death, and it is a dwelling that was acquired by the deceased on or after 20 September 1985.
An example of this in practice is as follows:
Dan bought a flat in April 1990 and was its sole occupant. He did not own or live in another property. When Dan died in January 2018, he left the flat to his son, Peter, who is named as the sole executor and Beneficiary in Dan’s Will. Peter then rented out the flat until January 2019 before selling it in May 2019, being 16 months after Dan’s died.
In this scenario, Peter is entitled to a full exemption from CGT on the sale proceeds because he (1) acquired the flat after 20 August 1996, and (2) disposed of it within 2 years of his father’s death.
ATO Discretion to Extend Two-Year Period
In circumstances where it is not possible to sell the deceased estate within the two-year prescribed period, the Commissioner of Taxation has a discretion to extend the two-year period by a further 18 months in what is called a Safe Harbour from capital gains.
The factors the Commissioner will consider when deciding whether to exercise the discretion to extend the two-year period were released in the Practical Compliance Guideline (PCG) 2019/5 and they include:
- During the first two years after the deceased’s death, more than 12 months was spent addressing one or more of the following issues:
- the ownership of the dwelling, or the will, is challenged
- a life 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, or
- settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of your control.
Taxpayers must satisfy all additional conditions specified in the PCG if they wish to have the capital gain or loss disregarded, being:
- the dwelling was listed for sale as soon as practically possible after those circumstances were resolved (and the sale was actively managed to completion)
- the sale completed (settled) within 12 months of the dwelling being listed for sale
- if any of the circumstances described in paragraph 13,
- waiting for the property market to pick up before selling the dwelling, delay due to refurbishment of the house to improve the sale price,
- inconvenience on the part of the trustee or Beneficiary to organise the sale of the house, or
- unexplained periods of inactivity by the executor in attending to the administration of the estate.) of this Guideline were applicable,
they were immaterial to the delay in disposing of your interest, and
- the longer period for which you would otherwise need the discretion to be exercised is no more than 18 months.
If the Executor has complied with these Safe Harbour compliance rules set out in the Guidelines, the Executor can manage their tax affairs as if the Commissioner had exercised its discretion to extend the two-year period by up to 18 months.
Accordingly, if all the conditions above are satisfied, the Executor does not need to apply to the Commissioner and can manage their tax affairs as if the Commissioner had extended the two-year period by up to 18 months.
Generally, a taxpayer’s main residence is considered to be a CGT asset, which means that when it is sold, the seller may be liable to pay tax on all, or part, of the capital gain. However, tax law provides an exemption for a dwelling that is the taxpayer’s main residence, where certain criteria are satisfied. This exemption means there will generally be no tax liability for the taxpayer upon the sale of the main residence. To be eligible for the main residence exemption, the following conditions must be satisfied:
- the taxpayer is an individual
- the taxpayer is an Australian tax resident
- the dwelling was the taxpayer’s main residence throughout the ‘ownership period’, and
- the dwelling was not transferred to the taxpayer as a Beneficiary in, or as the trustee of, a deceased estate.
However, in circumstances where a provision in the Will causes a delay in the disposal of the property (for example if the surviving spouse is given a life interest in a property) and the property was marketed and sold as soon as was practical afterwards (such as after the death of the surviving spouse), the Executor could rely on the safe harbour to avoid getting stung by CGT on the sale proceeds (provided no materially adverse factors were present).
Importantly, the main residence exemption will apply where an eligible person (provided for in the Will) uses the property as their main residence from the date of death until the property is sold.
Where Safe Harbour is not available and the Commissioner’s discretion is not exercised, capital gains will be calculated on the basis that the dwelling was acquired for its market value as at the date of the deceased’s death, whether it increases or decreases in value.
If you are an Executor and you fail to administer the estate in accordance with the law and the estate incurs additional losses or charges because of your delay or negligence, you may be held personally liable for damages to the Beneficiaries. Alternatively, if you are a beneficiary and you believe that you have been aggrieved by the actions of the Executor, you may be able to take action against them to compensate you for loss. In either event, the Court may make any orders that it thinks fit, including an order for damages to compensate the deceased estate for the loss caused by the Executor’s actions.
This is a complex area of law that sees important obligations imposed on Executors to act properly and competently in relation to the disposal of real property. As the matters described above are common to many estate administrations, it is essential that Executors take their duties seriously and are able to understand their legal obligations.
If you are an Executor who is concerned about complying with their duties at law or you are a Beneficiary that feels that the Executor is not properly administering a deceased estate, please contact us, so our experienced Wills & Estates Team can assist and advise you with any issues that you may have.
Our team of lawyers provide clear and timely advice and services on all areas of Wills and Estates law Australia-wide. Given that the legislative requirements for the construction and content of Wills, their execution, probate and administration and more changes from jurisdiction to jurisdiction, it is highly beneficial to engage legal experts who are well-versed in these rules and regulations across all areas of Australia.
Contact one of our offices today to discuss any legal issues you may have from preparing Wills to challenging them.
By Steven Hodgson & Michael Millin