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Capital Gains Tax and Deceased Estates

Written by Aaron Alston

Capital gains tax can be tricky to get a handle on at the best of times let alone the adding the emotional stress and anxiety involved dealing with a deceased estate.  This guide outlines capital gains tax (CGT) consequences that apply in the event of death and the rules that apply (excluding the deceased’s main residence.  It does not cover small business CGT concessions in the event of death.

A brief explanation of the terms referenced in this article:

Beneficiary – the person entitled to benefit from a deceased estate.

Deceased estate – the assets and liabilities belonging to someone who has died.

Executor – a person or persons who a deceased persona appoints in their will to administer their estate in the event of death

Final tax return – the executor of a deceased estate is required to lodge a “date of death” tax return for the deceased for the period from the start of the financial year to the date of the deceased’s death.

Joint tenants – type of co-ownership of property by two or more persons in equal shares.

Legal personal representative – the executor of the deceased estate or an administrator appointed to wind up the estate if the person does not leave a valid will.

Presently entitled – have an entitlement to trust income that cannot be affect by any other person and demand immediate payment of the income from the trust (beneficiaries under legal disability under 18 can still be presently entitled if they cannot demand immediate payment of the rust income because of their legal disability).

Testamentary trust – either fixed or discretionary, created under a will of an individual and can only come into existence upon the death of the individual.

CGT consequences for the deceased

Assets received by – Legal Personal representative/ Beneficiary/ Joint tenant

CGT consequences

  • All capital gains/losses that would normally arise from the transfer are disregarded.
  • The transferee bears all future CGT implications.
  • Any unused capital losses of the decease cannot e used of passed on to the transferee.

Assets received by – Tax advantage entity (e.g., complying superannuation fund)

CGT consequences

  • The deceased is taken to have incurred a CGT event immediately before death.
  • Capital gains can be offset again capital losses the deceased has at the time of death (unused capital losses cannot be carried forward).
  • The executor is required to include any net capital gains in the deceased’s final tax return

CGT consequences for the recipient after receiving an asset from a deceased person

1.  Assets owned by – Legal personal representative/executor

Transaction – Transfer to a beneficiary (including testamentary trust)

CGT consequences for owner – No CGT implications

2.  Assets owned by – Legal personal representative/executor

Transaction – Asset disposed of under normal terms of sale either to a beneficiary or a third party.

CGT consequences for owner – General CGT rules apply.  Net capital gain included as part of the estates’ assessable income (a deceased estate is generally concessional taxed as a resident individual for first years and after three taxed as a resident trust)

3.  Assets owned by – Testamentary trust

Transaction – Asset transferred to a beneficiary.

CGT consequences for owner – No CGT implications

4.  Assets owned by – Testamentary trust

Transaction – Asset disposed of to a beneficiary or third party.

CGT consequences for owner – General CGT rules apply.  Net capital gain included as assessable income to a presently entitled beneficiary of a trust (the trustee can make a choice to include any net capital gain in its assessable income that a presently entitled beneficiary is not entitled to benefit under the terms of the trust).

5.  Assets owned by – Beneficiary (resident taxpayer)

Transaction – Asset disposed.

CGT consequences for owner – General CGT rules apply (net capital gain as part of the beneficiary’s assessable income in the financial year of disposal)

6.  Assets owned by – Joint tenant

Transaction – Asset disposed

CGT consequences for owner – General CGT rules apply (net capital gain as part of the beneficiary’s assessable income in the financial year of disposal)

7.  Assets owned by – Tax advantage entity (e.g., complying superannuation fund)

Transaction – Asset disposed.

CGT consequence – General CGT rules apply (net capital gain as part of the tax entity’s assessable income in the financial year of disposal)

Cost base and CGT discount for the recipient after receiving an asset from a deceased person

If asset acquired by the deceased before 20 September 1985 – cost base is market value of the asset on the date of the deceased’s death.  50% CGT discount applies if sold more than 12 months after date of death.

If acquired by the deceased on or after 20 September 1985 – cost base is the deceased’s cost base on their date of death.  50% CGT discount applies if sold 12 months after the date on which the deceased acquired the asset.

Summary

  • Capital gains tax and deceased estates can both be very complex topics to navigate.
  • Depending on who the assets are received by and who they are owned by, different CGT consequences apply.
  • If you don’t have an effective estate plan in place, now would be the time to seek legal advice.

 

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