Extending the two year main residence exemption
When Tax Laws Amendment (2011 Measures No 9) Bill 2011 was given royal assent on 21 March 2012, it allowed certain discretions to the Commissioner of Taxation.
One such discretion allowed an extension of time for capital gains tax exemption for a dwellings of a deceased estate.
As a result, from the 2008/09 income year, the Commissioner could extend the deceased estate’s ownership of a main residence longer than two years.
That is, the dwelling that was the deceased’s main residence just before their death and was not used by them for producing assessable income. The explanatory memorandum to that Bill gave a few circumstances in which the Commissioner may extend the time period for beneficiaries.
These circumstances include when:
- the ownership of a dwelling or a will is challenged
- the complexity of a deceased estate delays the completion of administration of the estate
- a trustee of beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period, or
- settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee’s control.
A private binding ruling issued by the Commissioner of Taxation has detailed a circumstance it considers to be outside the beneficiary’s control.
In the private binding ruling, released in February 2017, the deceased had purchased a property prior to September 1985. The property was the main residence of the deceased for the entire time of ownership.
After probate was granted, the property mortgage liability and title was transferred to the beneficiaries, to prevent the repossession by the mortgaging bank.
The beneficiaries intended to sell the property between themselves, however, the transfer was delayed by the bank that was providing finance. The bank required demolition of a second residence, erected without council approval, on the property plus other repairs to be undertaken to the main residence.
As a provision was made regarding the second residence in the deceased’s will, additional time was required in order to finalise the financial matters. The sale of the property between the beneficiaries was made soon after.
The Commissioner deemed that a situation such as this was outside the beneficiaries’ control, and therefore an extension of the two-year exemption was allowed.
If you have any questions please do not hesitate to contact us.
Martin van der Saag
Director
T: 02 9984 7774
E: martinv@northadvisory.com.au
Norman Ruan
Accountant
T: 02 9984 7774
E: normanr@northadvisory.com.au
“The two-year ownership-period rule can be extended — where delays beyond the beneficiary’s control (like probate delays, will challenges or forced sale postponements) make a sale within 24 months impractical.”
About the author
Cayle Petritsch - Director & Wealth Advisor
Cayle Petritsch, Director and Wealth Advisor, works with our existing clients who have recognised the importance of business owners making strategic financial choices not only for their company, but for their personal finances too.
Cayle saw a great opportunity to expand North Advisory’s services into SMSF/superannuation, personal wealth management, asset protection services and other crucial personal finance facets that business owners need to consider.
His approach to wealth management allows you to receive highly personalised wealth advice. Working closely with Marius, Cayle understands the unique needs of every client, from their lifestyle and business goals to their retirement plans.
Key Takeaways
The two-year rule for inherited residences provides valuable CGT protection — but it's not an absolute deadline.
Thanks to safe-harbour guidelines and discretion, beneficiaries may still benefit from the full exemption if delays are outside their control.
Automatic extension is possible when delays stem from probate, legal issues or estate complexity.
These kinds of delays are recognised as valid reasons to extend the disposal period beyond 24 months under the safe-harbour provisions.
Timing of listing and sale matters — sale should commence as soon as practicable once delays resolve, and settlement should occur within 12 months of listing.
To satisfy extension criteria, the property must be listed promptly after the obstacle clears and sale completed within a reasonable timeframe.
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Frequently Asked Questions
What is the two-year main-residence exemption rule for inherited property?
When a person inherits a dwelling from a deceased estate (where the deceased lived in the home as their main residence and it wasn’t used to produce income), the property is generally exempt from Capital Gains Tax (CGT) if sold within two years of the death.
Can the two-year period be extended beyond 24 months?
Yes — if disposal is delayed due to exceptional circumstances outside the beneficiary’s control (e.g. probate delays, legal challenges to the will, complicated estate administration, delays in sale settlement), the exemption period may be extended.
Does the extension require a formal application to the tax office?
If the delay falls under the “safe-harbour” conditions established by the tax authority (for example a contested will, life interest, or sale delays beyond control) — and the dwelling is listed for sale as soon as practicable — the extension is automatic.
If not under safe-harbour conditions, you may still apply for discretion but will need to provide evidence supporting why the sale was delayed.
What kinds of delays can qualify for extension under the safe-harbour rules?
Qualifying delays include administration complexity of the estate, legal challenges to the will or ownership, equitable or life-interest rights delaying sale, or unforeseen issues in property sale (e.g. forced to re-list, failed contracts, or restrictions e.g. government orders such as pandemic lockdowns).
What happens if the property is sold after two years and no extension applies?
If the property is sold after the two-year period and no valid extension applies (or was not requested/approved), the main residence exemption may not apply — which means CGT could be payable. A partial exemption may still be possible depending on usage and periods of occupation.
What is the two-year main residence exemption rule?
It refers to the CGT rule that can allow a deceased person’s main residence to be sold within two years of death without triggering capital gains tax (in eligible situations).
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