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  • 5 Assets of a deceased estate

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    This chapter explains the special capital gains tax rules that apply to assets you own just before you die.

    When you die

    When you die, the assets that make up your estate can:

    • pass directly to your legal personal representative, who may dispose of the asset or pass it to the beneficiary or beneficiaries or
    • pass directly to the beneficiary or beneficiaries.

    Beneficiary

    A beneficiary is a person entitled to the assets of your deceased estate. They can be named as a beneficiary in your will or they can be entitled to the assets as a result of the laws of intestacy, which apply if you do not make a will.

    Legal personal representative

    A legal personal representative can be either the executor of your deceased estate - a person you appoint to wind up your estate in accordance with the will - or an administrator appointed to wind up your estate if you do not leave a will.

    Special rule for capital gains tax purposes

    As a general rule, a CGT event happens if an asset is transferred from one person to another. A person who makes a capital gain or loss from that CGT event must take it into account in determining their net capital gain or net capital loss for the income year. It is only if an asset is acquired before 20 September 1985 - a pre-CGT asset - that the capital gain or loss is disregarded.

    Under a special rule that applies on the occasion of your death, however, any capital gain or loss is disregarded if a post-CGT asset you own just before you die:

    • asses from you
      • to your legal personal representative or
      • to a beneficiary or
    • passes from the legal personal representative to a beneficiary.

    Additionally, if you make a testamentary gift of property - not land or a building - to a public library, museum or art gallery in Australia or to the Australiana Fund under the Cultural Bequests Program, any capital gain or loss is disregarded. Under this program, the Minister for Communications and the Arts must certify that the gift meets the specific requirements of the program.

    Exceptions to the special rule

    Any capital gain or loss is not disregarded if a post-CGT asset owned at the time you die:

    • passes from you
      • to a tax advantaged entity or
      • to a non-resident or
    • is transferred from your legal personal representative to an entity that is not a beneficiary.

    Tax advantaged entity

    A tax advantaged entity is:

    • a tax exempt entity – for example, a church or charity or
    • the trustee of:
      • a complying superannuation fund
      • a complying approved deposit fund or
      • a pooled superannuation trust.

    If an asset that forms part of your deceased estate passes to a tax advantaged entity, a CGT event happens in relation to the asset just before you die. A capital gain is made from the CGT event if the market value of the asset on the day you die is more than the cost base of the asset. A capital loss is made from the CGT event if the market value is ess than the asset's reduced cost base. Any capital gain or loss is taken into account in the date of death return (the return from the start of the income year to the day you die). The trustee of your deceased estate, not the tax advantaged beneficiary, pays any tax on any net capital gain.

    Non-resident beneficiary

    Any capital gain or loss is not disregarded if a post-CGT asset owned at the time you die passes to a non-resident for tax purposes and

    • you are an Australian resident at the time you die and
    • the asset does not have the necessary connection with Australia.

    Some examples of assets which have the necessary connection with Australia are real estate located in Australia and shares in an Australian resident private company.

    In this case, a CGT event happens in relation to the asset just before you die. A capital gain is made if the market value of the asset on the day you die is more than the asset's cost base. A capital loss is made if the market value is less than the asset's reduced cost base. Any capital gain or loss is included in the date of death return. Again, the trustee of your deceased estate, not the non-resident beneficiary, pays any tax on any net capital gain.

    Assets which pass to your legal personal representative or a beneficiary in your estate

    Main residence

    Special rules apply if the asset is your main residence - refer to Inherited main residence.

    Other assets

    Only the capital gain or loss made in relation to an asset that you hold at the time you die and which passes under your will or on intestacy to a legal representative or beneficiary - either directly or through the legal personal representative - is disregarded.

    How the special rule that disregards a capital gain or loss applies depends on whether you die before 20 September 1985 or on or after that date.

    In administering and winding up your deceased estate, a legal personal representative may need to dispose of some or all of the assets of the estate. Assets disposed of in this way are subject to the normal rules and any capital gain the legal personal representative makes on the disposal is subject to tax.

    Similarly, it may be necessary for the legal personal representative to acquire an asset - for example, to satisfy a specific legacy you make - and any capital gain or loss made on disposal of that asset by the legal personal representative is subject to the normal capital gains rules.

    If a beneficiary sells an asset they have inherited, the normal capital gains rules also apply.

    Death before 20 September 1985

    If a person died before 20 September 1985, their legal personal representative or a beneficiary in their estate is treated as having acquired the asset on the date of death.

    Death on or after 20 September 1985

    If you die on or after 20 September 1985, the following is relevant in calculating any capital gain or loss when a later CGT event happens to the asset - for example, a beneficiary in your estate sells it.

    Asset you acquired before 20 September 1985

    Your legal personal representative or a beneficiary in your estate is taken to have acquired the asset on the day you die.

    The first element of the cost base or reduced cost base - the amount they are taken to have paid for the asset - is the market value of the asset on the day you die.

    If, on or after 20 September 1985, you make a major improvement to a pre-CGT asset, when you die the improvement is not treated separately from the pre-CGT asset as a post-CGT asset. This is so for 2 reasons.

    • Separate asset treatment applies only if a CGT event happens in relation to the pre-CGT asset but no CGT event happens when you die.
    • Separate asset treatment applies only to post-CGT improvements made to pre-CGT assets.

    When you die, your legal personal representative or beneficiary is taken to have acquired assets of your deceased estate - including the pre-CGT asset that was improved - at the date of your death, that is, on or after 20 September 1985. The improvement in this situation was not made to a pre-CGT asset.

    Asset you acquired on or after 20 September 1985

    Your legal personal representative or a beneficiary in your estate is taken to have acquired the asset on the day you die.

    The cost base or reduced cost base of the asset on the day you die is taken to be the first element of the cost base of the legal personal representative or the beneficiary receiving the asset.

    Expenditure incurred by a legal personal representative

    A beneficiary can include in the cost base or reduced cost base any expenditure incurred by the legal personal representative that would have been included in their cost base if they had sold the asset instead of distributing it to the beneficiary. The expenditure can be included in the cost base on the day it was incurred.

    Example: Transfer of an asset from the executor to a beneficiary

    Mary died on 13 October 1999 leaving 2 assets: a parcel of 2,000 shares in ABC Ltd and a vacant block of land. John was appointed executor of the estate.

    Any capital gain or loss on transfer of the assets to John, the legal personal representative, is disregarded. John sells the shares to pay Mary's outstanding debts and, as the shares are not transferred to a beneficiary, any capital gain or loss on this disposal must be included in the tax return for Mary's deceased estate.

    When all debts and tax have been paid, John transfers the land to Mary's beneficiary, Jim, and pays the conveyancing fee of $5,000. As the land is transferred to a beneficiary, any capital gain or loss is disregarded. The first element of Jim's cost base is Mary's cost base on the date of her death. Jim is also entitled to include in his cost base the $5,000 John spent on the conveyancing.

    End of example

    Indexation and the CGT discount

    A legal personal representative or beneficiary of your estate can choose to claim frozen indexation or the CGT discount if they acquire the asset from the deceased estate on or before 11.45 am on 21 September 1999.

    As a general rule, you are entitled to index elements of the cost base of an asset only if you have owned it for at least 12 months when you dispose of it. If a legal personal representative or beneficiary receives an asset from an estate, the 12-month period is measured from the time the deceased acquired the asset and not from the date of death.

    If the legal personal representative or beneficiary acquires the asset on or before 11.45 am on 21 September 1999 but disposes of the asset after that time, they may choose to index the cost base or claim the CGT discount. The CGT discount is only available if the beneficiary or legal personal representative is an individual, a trust or a complying superannuation entity.

    To be eligible for the CGT discount, the legal personal representative or beneficiary must have acquired the asset at least 12 months before disposing of it. For the purposes of this 12-month ownership test, the legal personal representative or beneficiary is taken to have acquired the asset at one of the following times:

    • if the deceased person acquired the asset prior to 20 September 1985 – the date the deceased died
    • if the deceased person acquired the asset on or after 20 September 1985 – the date the deceased acquired it.

    If the legal personal representative or beneficiary acquires the asset after 11.45 am on 21 September 1999, only the CGT discount is available.

    Example: Indexing your cost base and CGT discount

    Leonard acquired a property on 14 November 1998 for $26,000. He died on 6 August 1999 and left the property to Gladys. She sold the property on 18 December 1999 for $40,000.

    The property was not the main residence of either Leonard or Gladys.

    Gladys acquires the property on 6 August 1999. However, for the purpose of determining whether she has owned the property for at least 12 months, she is taken to have acquired it on 14 November 1998 - the day Leonard acquired it. At the time of disposal she is taken to have owned the property for more than 12 months. As she acquired it before 11.45 am on 21 September 1999 and disposed of it after that date, Gladys can choose to index the cost base. If she does not choose to index the cost base she can claim the CGT discount.

    End of example

    Collectables and personal use assets

    A collectable or personal use asset you acquire on or after 20 September 1985 is still treated as a collectable or personal use asset when it passes to a beneficiary in your estate or your legal personal representative.

    Joint tenants

    If 2 or more people acquire an asset together, it can be either as joint tenants or as tenants in common.

    At general law, if you are a joint tenant and you die, your interest in the property passes to the surviving joint tenant or tenants. It is not an asset of your deceased estate.

    At general law, if you are a tenant in common and you die, your interest in the property is an asset of your deceased estate and can only be transferred to a beneficiary of your estate or be sold or otherwise dealt with by the legal personal representative of your estate.

    For capital gains tax purposes, joint tenants are treated as if they are tenants in common owning equal shares in the asset. However, for CGT purposes your interest in the asset is taken to pass, on the date you die, to the surviving joint tenants in equal shares as if your interest is an asset of your deceased estate and as if they are beneficiaries.

    The cost base rules applicable to other assets of your deceased estate apply to the interest in the asset or the equal share of it which passes to the surviving joint tenants.

    The surviving joint tenants are taken, for the purposes of applying the indexation rules and the CGT discount 12-month ownership rules, to have acquired the interest in the asset or their share of it at the time you acquired it.

    Example: Capital gains as joint tenants

    Trevor and Kylie acquired land as joint tenants before 20 September 1985. Trevor died in October 1999. For capital gains tax purposes, Kylie is taken to have acquired Trevor's interest in the land at its market value at the date of his death. Kylie holds her original 50 per cent interest as a pre-CGT asset, and the inherited 50 per cent interest as a post-CGT asset which she is taken to have acquired at its market value at the date of Trevor's death. If Kylie sold the land within 12 months of Trevor's death, she would not qualify for the CGT discount on any capital gain she makes on her post-CGT interest because she did not own that interest for at least 12 months. Neither would Kylie's post-CGT interest qualify for indexation because she acquired it after 21 September 1999 - that is, on Trevor's death.

    End of example

    Prior year net capital losses

    If you have prior year net capital losses which cannot be used to offset any net capital gain before you die, the benefit of those losses is lost and cannot be passed to your legal personal representative or to a beneficiary in your estate.

    Last modified: 18 Sep 2009QC 18323