ATO releases new Practical Compliance Guidelines on Taxation of Estates

The Commissioner of Taxation today announced two commercially oriented Practical Compliance Guidelines (PCGs) relating to the taxation of deceased estates, for which he should be highly commended.

PCG 2018/4

This Guideline is the finalisation of Draft PCG 2017/D12 which was issued for public consultation in July last year. The Draft Guideline proposed that a Legal Personal Representative (LPR) of certain smaller and less complex deceased estates could distribute estate assets without either compromising or exposing themselves to a personal tax liability in respect of the deceased’s pre-death tax obligations where certain conditions were met.

Our summary of the conditions set out in PCG 2017/D12 can be downloaded here.

The finalised PCG 2018/4 has added the following two requirements which must be met by smaller estates should an LPR wish to rely on the finalised guideline in administering the estate:

1.  That the deceased was not a member of a Self-Managed Superannuation Fund (SMSF).

The insertion of this additional condition is not surprising especially given the ability for the ATO to issue a Division 293 assessment imposing an extra 15% tax on individual members to the extent that a person’s adjusted taxable income and concessional superannuation contributions exceed the prevailing Division 293 threshold which has been $250,000 since 1 July 2017.

Where such a Division 293 assessment is issued in respect of a deceased taxpayer the LPR will be liable for the additional 15% tax if it was not paid by the deceased. Alternatively, the LPR could provide a release authority to the superannuation fund so that the outstanding tax could be paid out of the deceased member’s fund balance.

It is important to note that not all superannuation funds can comply with a Division 293 release authority which would therefore remain an estate tax obligation. Moreover, the annual reporting cycle of member contributions by the trustees of an SMSF may not be required to be submitted to the ATO until May of the following year thereby delaying the issue of a Division 293 assessment notice.

Accordingly, this additional condition recognises the complexity associated with the deceased having outstanding tax obligations in respect of any superannuation contributions made to an SMSF and is therefore an understandable concern of the ATO.

2.   That no estate assets are intended to pass to tax-advantaged entity.

The inclusion of this further condition recognises that a capital gains tax (CGT) liability may arise where the deceased owned a CGT asset which passes to a tax-advantaged entity on that person’s death. Such tax-advantaged entities include a tax-exempt entity, the trustee of a complying superannuation fund and a foreign resident to the extent the asset was not taxable Australian property.

Essentially, where there is an in-specie transfer of an asset that is non-taxable Australian property by the deceased to a tax-advantaged beneficiary, a CGT liability will arise where the market value of the asset as at the date of the deceased’s death is more than its cost base. Such a gain must be included in the deceased’s date of death income tax return which adds complexity particularly as the calculation of any gain requires that asset’s market value be determined as at the date of death of the deceased.

Understandably this is not a widely understood potential CGT exposure particularly because where the asset is gifted by the deceased under their will as such a CGT liability will not arise where the tax-exempt entity is also a deductible gift recipient.

PCG 2018/D6

This Draft Guideline is currently only a draft for consultation only, which when finalised is proposed to apply to both before and after its date of issue.

The Draft Guideline concerns the Commissioner’s discretion to extend the two-year period in which an LPR can both sell and settle the disposal of the deceased’s main residence without incurring CGT.

PCG2018/D6 provides LPRs and their advisers with detailed guidance on the factors that the Commissioner will consider in extending the period in which the main residence can be sold by the LPR without attracting CGT beyond the two-year period from the date of death of the deceased which otherwise applies.

Broadly, the Draft Guideline also provides an LPR with a safe harbour that the Commissioner will exercise the discretion to give an LPR a further period of 12 months to arrange the sale and settlement of the main residence where all of the following conditions are satisfied:  

  • During the first 2 years after the interest in the dwelling passed to the LPR or beneficiary more than 12 months was spent addressing issues such as the ownership of the dwelling or the terms of the will being challenged; the grant of a life or other equitable interest under the will delaying the disposal of the dwelling; settlement being delayed or falling through for reasons outside the LPR’s control; or the completion of the estate’s administration being delayed because of its complexity;
  • 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);
  • settlement was completed within 6 months of the dwelling being listed for sale;
  • the delay in the sale of the property was not due to reasons such as the LPR waiting for the property market to pick up before selling the dwelling; the house being refurbished to improve its sale price; it was inconvenient for the LPR to organise the sale of the dwelling; or for any other unexplained periods of inactivity by the LPR in administering the estate; and
  • the longer period sought under the discretion is no more than 12 months.

We welcome the issue of the above guidelines which demonstrate that the ATOs continued commitment to provide meaningful and practical guidance on how tax related issues of  deceased estates can be effectively administered by LPRs.