CAPITAL GAINS TAX AND DECEASED ESTATE ASSETS
What happens with income tax when a person is deceased?
When a person passes away their executors are required to lodge a final income tax return (ITR) up to the date of their death in order to finalise their income tax affairs (this ITR will not be able to be lodged until after the following 30th June).
This ITR will include all taxable income and deductable expenses from the previous 1st July up until the date of death (DOD).
From the DOD onwards a new taxpayer is recognised, being the Estate of the deceased.
A new tax file number (TFN) is required for the Estate and the Estate will lodge an ITR taking into account all taxable income and deductable expenses from the first day after the DOD through to the following 30th June. Further ITR’s may be needed if the Estate continues on for further periods.
Capital gain tax (CGT) and Estate assets.
The first thing to be aware of is that the death of a taxpayer does not trigger a CGT event.
The only time there will be a CGT event is when the Estate or a beneficiary sells an asset on the open market.
What happens with assets transferred to a beneficiary from the Estate?
The beneficiary takes over the cost base circumstances of the asset that applied to the deceased person.
Two scenarios possible:
1/ Assets acquired by deceased post 19/9/1985 and transferred to beneficiary.
Beneficiary takes up deceased person cost circumstances and on sale of the asset will need to calculate their CGT position & report it in their next ITR.
Example – 200 BHP shares cost deceased $4,000, purchased in Dec 2000 (post 19/9/1985), beneficiary cost base is $20 per share.
Beneficiary sells 200 shares at some stage for $30 = $10 gross cap gain per share
Less 50% discount because shares owned by deceased and beneficiary for more than one year
Equals amount to include in beneficiaries next ITR $5 per share capital gain for each share sold.
2/ Assets acquired by deceased pre 19/9/1985 and transferred to beneficiary.
Assets acquired pre 19/9/1985 and transferred to beneficiary, the beneficiary for CGT purposes has acquired the asset at its market value at the DOD of the deceased.
Example - 200 – BHP cost deceased $20 per share in Dec 1980 (pre 19/9/1985) but on death they were on the market for $25
Beneficiary ends up selling shares for $30
= Gross capital gain of $5 per share
Less 50% discount because shares owned by deceased and beneficiary for more than one year
Equals amount to be included in beneficiaries next ITR $2.50 per share capital gain for each share sold.
What happens if Estate sells asset?
If you have the Estate sell the asset and beneficiary gets the cash distributed to them from the Estate.
The cash that comes to the beneficiary is tax free BUT the Estate will need to include any capital gain in it’s next ITR and potentially pay tax on the gain.
Example scenario’s one & two above apply to this situation in relation to how much is taxable of the sale price.
Pre 19/9/1985 purchased shares = $2.50 per share
Post 19/9/1985 purchased shares = $5.00 per share
How are Estates taxed?
For up to three years after someone passes away (as long as the Estate has not been wound up fully) the Estate is treated like an individual taxpayer – so
$18,200 tax free then 19% up to $37,000
then 32.5% up to $80,000
then 37% up to $180k
then 45% on every dollar over $180,000
BUT NO MEDICARE LEVY (which would usually add 2% to the rates indicated above) – as a deceased person won’t be using any medical system.
Beyond three years the rate of tax paid by an Estate is still similar to individuals BUT the Estate loses access to the tax free threshold on the first $18,200 of income earned (it pays tax on all income earned).
You can see that under both options –
- Sell assets in Estate name or
- Transfer assets to individual and sell in their name,
the same amount of capital gain is taxable by the ATO
Thus the question as to how to reduce CGT revolves around – who will pay the least tax, the beneficiary or the Estate if the asset is to be sold?
Your personal circumstances
Beneficiaries will need to look at their own personal income circumstances in order to determine where assets that have been left to them might best be sold and compare their income tax rate to that of the Estates.
The executors of the Estate need to be made aware that there may be income tax that can be saved
by ascertaining the Estates CGT position in relation to each asset held in the Estate.
Once each asset’s CGT status is known, beneficiaries are then in a position to assess where and when they may want assets left to them to be sold or they may decide to have the asset transferred to them and they hold the asset until such time as they wish to sell it.
Executors should always ascertain an Estates CGT details on each asset as assets transferred to beneficiaries need that information provided to the beneficiary so that when they sell the asset they disclose the correct amount of capital gains in their ITR.
Likely questions
Can an Estate sell some assets in its own name and transfer some to beneficiaries?
Yes; executors will generally have the powers to do this via the will BUT the will needs to be read carefully to ascertain that the executors have this option.
What happens if a beneficiary has an asset transferred to them from the Estate and then becomes deceased themselves and leaves the asset to their beneficiary?
The second beneficiary then takes on the post 19/9/1985 CGT status that attached to the asset.
When the second beneficiary sells the asset they will need to include any capital gain in their next ITR.
As you can see deceased estates are a complicated system for tax purposes.
Always seek professional advice regarding your exact situation as every situation is different.
2016-03-29
