• Deceased estates and capital gains tax

    When a person dies, an asset in their estate can pass:

    • directly to beneficiaries (that is, people entitled to the assets of the deceased estate)
    • directly to their legal personal representative (their executor or an administrator appointed to wind up the estate)
    • from a legal personal representative to a beneficiary.

    If you're a beneficiary or legal personal representative, you are taken to have acquired the asset on the day the person died, but CGT does not apply when you acquire the asset. CGT may apply if you later dispose of the asset. The date of the person's death may be relevant when you calculate the capital gain.

    If the asset is transferred to a tax-advantaged entity (such as a charity) or to a foreign resident under the terms of the will, CGT will apply to the transfer and must be accounted for in the person's date of death tax return.

    If the deceased person acquired their asset before 20 September 1985, the first element of your cost base and reduced cost base is the market value of the asset on the day the person died, unless they made major improvements to it after that date.

    If the deceased had any unapplied net capital losses when they died, these are not passed on to you as the beneficiary or legal personal representative – that is, you can't use any such losses to offset against any net capital gains.

    Find out about:

    See also:

    Keeping records of inherited assets

    When you inherit an asset you must keep special records.

    If it was a pre-CGT asset for the person you inherited it from (that is, they acquired it before 20 September 1985), you need to know its market value at the date they died, and any related costs incurred by the legal personal representative. The total of this is the amount the asset is taken to have cost you.

    If the legal personal representative has had the asset valued, ask for a copy of the valuation report. If not, you'll need to get your own valuation.

    If the deceased acquired the asset on or after 20 September 1985, you need details of all related costs they incurred as well as those incurred by the legal personal representative. They should be able to give you these details.

    See also:

    Assets passing to tax-advantaged entities and foreign residents

    Normally a capital gain or loss is disregarded when a CGT asset passes from the deceased to a beneficiary or legal personal representative.

    However, a capital gain or loss is not disregarded if a post-CGT asset passes from the deceased to a tax-advantaged entity or foreign resident.

    In these cases, a CGT event is taken to have happened to the asset just before the person died. The CGT event will result in a:

    • capital gain if the market value of the asset on the day the person died was more than the cost base of the asset
    • capital loss if the market value was less than the asset's reduced cost base.

    These capital gains and losses should be taken into account in the deceased person’s ‘date of death return’ (the tax return for the period from the start of the income year to the date of the person’s death).

    Any capital gain or loss from a testamentary gift of property can be disregarded if the gift is made to a deductible gift recipient and the gift would have been income tax deductible if it had not been a testamentary gift.

    Tax-advantaged entity

    A tax-advantaged entity is either:

    • a tax-exempt entity (for example, a church or charity)
    • the trustee of a:
      • complying super fund
      • complying approved deposit fund, or
      • pooled super trust.
       

    Foreign resident beneficiary

    If a foreign resident is a beneficiary of a deceased's post-CGT asset, any capital gain or loss is taken into account in preparing the deceased person’s date of death return if both of the following apply:

    • the deceased was an Australian resident when they died
    • the asset is not ‘taxable Australian property’ in the hands of the beneficiary.

    See also:

    Disposing of assets from a deceased estate

    If you sell an asset you've inherited – other than a dwelling – the normal CGT rules apply. Similarly, the normal CGT rules apply if a legal personal representative sells an asset from a deceased estate.

    If the asset is a dwelling, special rules apply – for example, the main residence exemption may apply in part of full. See Inherited dwellings.

    If the asset is a collectable or personal-use asset, it continues to be treated as one when you receive it.

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    Winding up a deceased estate

    In administering and winding up a 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 CGT.

    Similarly, it may be necessary for the legal personal representative to acquire an asset – for example, to satisfy a specific legacy made. Any capital gain or loss they make when they dispose of that asset to the beneficiary is subject to the normal CGT rules.

    Cost base of asset

    Assets acquired by the deceased before 20 September 1985

    If the deceased acquired the asset before 20 September 1985, the first element of your cost base and reduced cost base (that is, the amount taken to have been paid for the asset) is the market value of the asset on the day the person died.

    If, before they died, a person made a major improvement to a pre-CGT asset on or after 20 September 1985, the improvement is not treated as a separate asset by the legal personal representative or beneficiary. They are taken to have acquired a single asset. The cost base of this asset is equal to the cost base of the major improvement on the day the person died plus the market value of the pre-CGT asset (excluding the improvement) on the day the person died.

    Assets acquired by the deceased on or after 20 September 1985

    If the deceased acquired the asset on or after 20 September 1985, the first element of your cost base and reduced cost base is taken to be the deceased’s cost base and reduced cost base for the asset on the day they died.

    There is an exception if the asset is a dwelling and certain conditions are met.

    If the deceased died before 21 September 1999, and you choose the indexation method to work out the capital gain when you dispose of the asset (or when another CGT event happens), you index the first element of the cost base from the date the deceased person acquired it up until 21 September 1999.

    If the deceased died on or after 21 September 1999, you can't use the indexation method and, when you dispose of the asset, you must recalculate the first element of your cost base to leave out any indexation that was included in the deceased’s cost base.

    If you're the trustee of a special disability trust, the first element of your cost base and reduced cost base is the market value of the asset on the day the person died.

    Expenditure incurred by a legal personal representative

    As a beneficiary, you can include in your cost base (and reduced cost base) any expenditure the legal personal representative would have been able to include in their cost base if they had sold the asset instead of distributing it to you. You can include the expenditure on the date they incurred it.

    For example, if an executor incurs costs in confirming the validity of the deceased’s will, these costs form part of the cost base of the estate’s assets.

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

    Maria died on 13 October 2000 leaving two assets – a parcel of 2,000 shares in Bounderby Ltd and a vacant block of land. Giovanni was appointed executor of the estate (the legal personal representative).

    When the assets were transferred to Giovanni as legal personal representative, he disregarded any capital gain or loss. Giovanni sold the shares to pay Maria's outstanding debts. As the shares were not transferred to a beneficiary, any capital gain or loss on this disposal must be included in the tax return for Maria's deceased estate.

    When all debts and tax had been paid, Giovanni transferred the land to Maria's beneficiary, Antonio, and paid the conveyancing fee of $5,000. As the land was transferred to a beneficiary, any capital gain or loss to date is disregarded. The first element of Antonio's cost base is taken as Maria's cost base on the date of her death. Antonio is also entitled to include in his cost base the $5,000 Giovanni spent on the conveyancing.

    End of example

    Choosing a calculation method

    There are three methods of calculating a capital gain: the indexation, discount and ‘other’ methods.

    The method you can use depends on when the asset was acquired and whether you are disposing of it as an individual, trust, complying super fund or other entity.

    When applying the 12-month ownership test for the indexation method, you're taken to have acquired the asset when the deceased acquired it, not on the date of their death.

    For the discount method, you're taken to have acquired the asset:

    • on the date the deceased died, if they acquired the asset before 20 September 1985
    • on the date they acquired the asset, if they acquired it on or after 20 September 1985.

    See also:

    Example: Indexation and CGT discount

    Leonard acquired a property on 14 November 1998. He died on 6 August 1999, leaving the property to Gladys. She sold the property on 6 July 2016. The property was not the main residence of either Leonard or Gladys.

    Although Gladys acquired the property on 6 August 1999, for the purpose of determining whether she had 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, Gladys had owned the property for more than 12 months. As she is taken to have acquired it before 11.45am (by legal time in the ACT) on 21 September 1999 and disposed of it after that date, Gladys could choose to index the cost base. However, if the discount method gave her a better result, she could choose to claim the CGT discount.

    If Gladys chooses the discount method, she will have to exclude from the first element of her cost base the amount representing indexation that had accrued to Leonard up until the time he died.

    End of example

    Life and remainder interests

    There may be CGT consequences on the creation, surrender, expiry or disposal of a life interest or remainder interest.

    A life interest is an interest in the income of a trust for life or an estate for life in real property not held on trust.

    A remainder interest is an interest in the capital of a trust or an estate in remainder in real property not held on trust.

    See also:

    • Taxation Ruling TR 2006/14 – Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests
    • Inherited dwellings
    Last modified: 17 Jul 2017QC 52245