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25 January 2018

Only two certainties in life

Wills, Powers, Estates & Family Provision Claims
Federal

Asked

Estates and capital gains tax

My client is an executor. The testator died 18 months ago. He has just sold the deceased's property. Does he pay any Capital Gains Tax? How long can a property be kept for by the executor before Capital Gains kicks in? The property was purchased after 1986.

Answered

Thank you for the question

The following is an extract from the Probate guide:

Capital gains tax

A change of ownership due to death is not normally a capital gains tax event. The move of the asset to the beneficiary through the personal representative is not a disposal. The gain or loss is taxable when next disposed of. The inheritance and postponement of tax can take place several times.

The exception is a gift to an exempt entity. Exempt entities are charities that are tax exempt, non-residents and complying superannuation funds. As these entities do not pay tax, the capital gains tax crystallises and is payable by the estate on transfer to the exempt entity.

The estate pays the capital gains tax unless the gift in the will says that the tax is payable by the exempt entity.

Charities that are part of the Cultural Gifts Program, including public museums, libraries, art galleries and the Australiana Fund, whilst not taxable are not exempt entities for these purposes and no capital gains tax issues arise in relation to gifts to them.

Assets purchased before 20 September 1985 are subject to capital gains tax in the hands of the beneficiaries from the date of death onwards. Assets purchased after 20 September 1985 are subject to capital gains tax in the hands of beneficiaries from the date of the cost base forwards. This means CGT accrues from those dates and becomes payable on the next sale.

The main residence does not attract capital gains tax until two years after the date of death, assuming a beneficiary or purchaser does not continue the main residence exemption.

If assets are held for 12 months or more before they are sold, the net capital gain 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.

Life interests and rights to occupy are ownership interests that continue the main residence exemption.

So far as the capital gains tax result of survivorship is concerned, joint tenants are treated as tenants in common with an equal interest in the asset. The survivor is deemed to have acquired the half share of the deceased at the date of death. The severance itself has no capital gains tax consequence. When the survivor sells, if the half share of the deceased was acquired before 20 September 1985, then capital gains tax accrues from the date of death onwards. If acquired after 20 September 1985, then capital gains tax accrues from the date of the cost base forwards.

If a property passes to a beneficiary by agreement of all beneficiaries, then any capital gains tax liability is effectively rolled over. However, if a beneficiary is given an option in the will to acquire a property, then capital gains tax applies to the sale. The testamentary option works to give the property to the beneficiary on its exercise free of debt but with the price coming into the estate for distribution and subject to capital gains tax.

NB: Whilst valuations may not always be necessary from the estate’s point of view, they may indeed be necessary from the point of view of the beneficiaries and future taxation implications upon disposal of inherited assets. They may also be necessary if it appears a dispute may be possible.

Regards

Mentor