Question
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31 August 2018

Death and taxes…

Wills, Powers, Estates & Family Provision Claims
Federal

Asked

Estates - Capital gains tax consequences

Regarding capital gains tax for estates, I wish to clarify the following:

1. A beneficiary pays capital gains tax not when he/she inherits the property but when he or she sells? (provided no exemption applies).

2. Does a legal personal representative pay CGT - upon the sale of a property to convert it into cash? (provided no exemption applies).

3. Please define cost base - does it mean the market value?

Answered

Thank you for the question.

1. Correct. Capital gains tax (CGT) is payable on the subsequent transfer of the asset by the beneficiary, provided no exemption applies.

2. The transmission of the estate’s 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. The tax will be payable later by the estate or the beneficiaries. There are some limited exceptions to this, essentially for situations where the Australian Taxation Office might not get the tax later – for example, where the will gives an asset to a superannuation fund, a tax-exempt entity, or non-residents.

If the executor then sells the asset, unless a relevant exemption applies, the estate is assessed for CGT. Once the tax is paid by the estate, the balance of the proceeds of sale is then distributed to beneficiaries tax-free.

Alternately, if the executor transfers the assets to the beneficiaries directly, or ‘in specie’, instead of selling, then a CGT rollover occurs and the liability for the CGT is transferred to the beneficiary, payable when they ultimately sell the asset as per point 1 above.  

3. The cost base of an asset depends on when the deceased acquired the asset. The cost base is not simply the purchase price, but all costs of acquiring the asset. For example, with residential property, the cost base will usually include stamp duty and legal fees, interest on any loan funds used for the purchase and the costs of any repairs and improvements. For assets acquired by the deceased after 20 September 1985, the estate effectively inherits the deceased’s cost base and that is the starting point for assessment of capital gain.

For assets acquired by the deceased before 20 September 1985, being pre-CGT, there is no ‘cost base’ as such, so market value as at the date of death is used to determine the acquisition value of the asset - and therefore the cost base of the asset - to the estate or beneficiary who assumes the liability for paying CGT when the asset is ultimately sold.

Regards

Mentor