Capital gains tax in deceased estates

If you have been appointed to administer a deceased estate, it is important to consider the application of Capital Gains Tax (CGT) when disposing of estate assets. CGT can vary depending on a number of factors, including the type of assets involved and the timeframe in which the estate is administered.

An executor (or administrator) may need to sell or transfer estate assets to beneficiaries as part of their role in administering the estate. There can be advantages and disadvantages of selling and transferring assets, which should be considered carefully during this process.  

CGT applies when an asset is disposed that is subject to CGT, known as a CGT event. There are a number of factors to consider in determining whether CGT applies, including:

1. Whether the asset was acquired before 20 September 1985, when CGT was introduced. Assets acquired before this date are exempt from CGT.

2. Whether a property was the deceased’s principal place of residence. A CGT exemption may apply in these circumstances, including if a beneficiary sells the property within 2 years of the deceased’s death.

3. Whether the deceased had shares or investment properties – CGT generally applies to the sale of shares and investment properties, unless a relevant exemption applies.

There are other factors and exemptions that may apply in your circumstances.

If an executor sells an asset as part of the administration of an estate, the estate will be assessed for CGT when a tax return is filed on behalf of the estate. Whilst the proceeds can then be distributed to the beneficiaries as a gift, the overall value of the estate may be reduced by the application of CGT. As deceased estates are treated as individuals for tax purposes for the first three years, there may be benefit in selling assets over the course of that period to take advantage of the tax free threshold.

In the alternative, an executor may transfer estate assets to beneficiaries in specie (in its current form). This means no CGT is immediately payable on the transfer, but will rollover and apply to any future sale of the asset. As such, it is important to consider CGT before transferring specific assets to beneficiaries, particularly shares and other investments.

It is recommended to seek legal and accounting advice before administering a deceased estate. If you would like to discuss your situation and how we can assist you, please contact us today on (02) 6225 7040 by email info@rmfamilylaw.com.au or get started now online.

Author: Amy Davis

Capital Gains Tax and why it’s important for your Property Settlement

If you are negotiating a property settlement with a former partner, it is important that you are alert to the risk of any future taxation consequences of the settlement, so you can make informed decisions accordingly.

Why is capital gains tax relevant for my property settlement?

The first step to determining the outcome of a property settlement is to identify and value all property, liabilities, superannuation and financial resources in which each party has an interest.

A capital gains tax liability may be treated by the Court as a liability to be deducted from the net asset pool as part of your property settlement, in the same way that the Court would treat a secured mortgage.

Capital gains or other taxation liabilities may need to be shared by you and your former partner, if there is an intention to sell an asset which will trigger a capital gains tax event. It may impact only one party, depending on how the relevant real property is held/owned.

The Court will not however have regard to a potential capital gains tax liability that may be incurred by one party at some point in the future, if they have no present intention to dispose of the property.

This means that the Court will usually take into account any current or anticipated capital gains tax liability if there is an intention to sell property, or the property has already been sold but the CGT trigger has not yet occurred. For example, an investment property has been held jointly for a period of 5 years during a marriage. One party intends on retaining that investment property, as part of the property settlement to rely on it as a future income stream. That party will not receive an adjustment for any future capital gains tax liability, despite the fact that the property was jointly owned for a period.

In what circumstances might I need to consider obtaining advice in relation to capital gains tax?

In a family law context, capital gains tax commonly arises when there is a sale of an investment property or shares.  You should obtain accounting advice in relation to your eligibility for CGT roll-over relief and any taxation consequences (including stamp duty) associated with your property settlement, and ideally, supplement that with financial advice. We are proud to work with a range of reputable Canberra financial advisors and accountants who we often recommend our clients to, for financial or accounting advice.

How do I ensure that a capital gains tax liability is taken into account as part of my property settlement?

In the same way that the Court requires valuations of real property, the Court must have independent and reliable evidence as to the value (or anticipated value) of a capital gains tax liability. This evidence would need to come from a suitably qualified accountant. 

You should obtain family law advice when negotiating and finalising the terms of your property settlement, to ensure that liabilities such as capital gains tax are appropriately taken into account as part of Court Orders or a Binding Financial Agreement. As specialist family lawyers, we see where things go wrong and the importance of doing things properly the first time around!

If you would like to make an appointment to discuss your circumstances with a member of our team, please contact us on (02) 6225 7040, via email at info@rmfamilylaw.com.au or get started online here.

By Margot McCabe