Capital Gains Tax: Issues for Executors and Beneficiaries
CGT issues are of particular importance for trustees and beneficiaries of deceased estates. Administration choices can have a significant bearing on the amount of tax paid and by whom.
What is CGT?
Capital gains tax (CGT) is the tax you pay on “capital gains” arising from the disposition of most assets acquired on or after 20 September 1985.
Since CGT is a component of your income tax included in your annual tax return, the applicable tax rate depends on the extent of your other income.
When is CGT triggered?
When a person dies, the assets must be transmitted to the person’s executor (or administrator). The executor must then either sell the assets, or transfer them to beneficiaries in specie, depending on the terms of the Will and the position of the estate.
The initial transmission of assets to the executor does not usually give rise to CGT because of the CGT Rollover provisions in Division 128 in the Income Tax Assessment Act 1997 (ITAA97). There are some limited exceptions to this, such as where the terms of the Will give an asset to a superannuation fund or non-residents, or to certain tax-exempt entities.
If the executor then sells the asset, then unless a relevant exemption applies the estate is assessed for CGT. The proceeds can then be distributed to beneficiaries tax-free.
If the executor transfers the asset to a beneficiary in specie, no CGT is immediately payable. There is a CGT Rollover, meaning the beneficiary will be liable to pay CGT when the beneficiary sells the asset in the future.
The CGT “rollover” provisions will often be of particular interest and significance to those beneficiaries inheriting share portfolios, which often include significant unrealised capital gains.
Sometimes the testator may gift assets on trust. This often occurs where the beneficiaries are young children, and the testator wishes the children to become entitled to the assets once they reach a certain age. A trust created under a will is called a “testamentary trust”.
The Commissioner generally treats a testamentary trustee in the same way as the executor for CGT purposes, so that capital gains in the hands of the trustee are disregarded, provided the trust assets were owned by the deceased.
Cost base of assets
Tax is paid on the amount of any “capital gain”. The capital gain is the difference between the cost base of the asset, and the proceeds of its sale.
For example, take the case of a dwelling house. The cost base may include the purchase price, stamp duty and conveyancing fees, interest on the mortgage, and the costs of repairs and improvements.
For assets acquired by the deceased after 20 September 1985, the estate effectively inherits the deceased’s cost base. For assets acquired by the deceased before 20 September 1985, the estate’s cost base is the market value of the asset at the date of death.
Discount capital gains
If assets are held for 12 months or more before they are sold, the net capital gain to be included in your tax return is reduced by 50%. In the case of deceased estates, the holding period is taken to have commenced when the deceased acquired the asset (except for assets acquired before 20 September 1985, in which case the holding period commences on the date of death).
However, for assets acquired after 20 September 1985 but before 21 September 1999, indexation of the cost base is an alternative to the 50% discount which may be financially advantageous. Trustees should consider which is preferable in their particular circumstances and take advice if necessary.
Main residence exemption
In general, no capital gains or losses occur in relation to the sale of an individual’s main residence. This full exemption generally extends to the deceased estate, provided that:
the dwelling is sold, and settlement completed, within 2 years of the date or death
the dwelling continues to be occupied by the deceased’s spouse, by an individual who has a right to occupy the dwelling under the will, or by the beneficiary
However this exemption is subject to numerous exceptions and modifications, such as when the dwelling is used to produce income. Further, if the full exemption is not available, a partial exemption may apply. Advice should be sought if there is any uncertainty.
Personal use assets and collectables
Capital gains from “personal use assets” purchased for less than $10,000 are disregarded. Personal use assets are defined as assets, other than collectables and land, used or kept primarily for the personal use or enjoyment of the individual or their associates.
“Collectables” include works of art, jewellery, rare folios, manuscripts or books, postage stamps, coins or medallions and antiques. As a general rules, capital gains on collectables are disregarded if the price and market value of the acquisition was $500 or less. Capital losses on collectables can only be offset against capital gains realised on other collectables.
Please contact Daniel Kelliher or Stefan Manche for advice relating to your particular circumstances or if you require powers of attorney tailored to your needs.
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