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  • Deceased estates and capital gains tax

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

    • directly to beneficiaries known as people entitled to the assets of the deceased estate
    • directly to their legal personal representative such as 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 acquire the asset on the day the person died. Capital gains tax (CGT) does not apply when you acquire the asset, it 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.

    CGT will apply if the asset is transferred under the will to a tax-advantaged entity (such as a charity), or to a foreign resident. You must report this in the person's date of death tax return.

    If the deceased person acquired the 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. This is unless they made major improvements to it after that date.

    If the deceased had any unapplied net capital losses when they died these do not transfer to you as a beneficiary or legal personal representative. This means 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.

    You need to determine if it was a pre-CGT asset for the person you inherited it from which means whether they acquired before 20 September 1985. You also 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’. This is 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 such as a church or charity
    • the trustee of a 
      • complying super fund
      • complying approved deposit fund
      • pooled super trust.
       

    Foreign resident beneficiary

    If a foreign resident is a beneficiary of a deceased's post-CGT asset, we take any capital gain or loss 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:

    Inherited dwelling from a foreign resident

    If you inherit an Australian residential property from a deceased person who was a foreign resident for six years or less at the time of their death, the main residence exemption that the deceased accrued for the dwelling is available to you as the beneficiary. The main residence exemption means you may not pay CGT on any capital gain made after you sell or dispose of the inherited property depending on the use of the property by both you and the deceased.

    If you inherit an Australian residential property from a deceased person who had been a foreign resident for more than six years at the time of their death, any main residence exemption that the deceased person may have accrued for that dwelling is not available to you as the beneficiary. This means you may have to pay CGT when you sell or dispose of the property.

    If you inherit an Australian residential property and you have been a foreign resident for more than six years when you sell or dispose of the property, you can't claim the main residence exemption for your ownership period.

    See also:

    Example: Inherit dwelling from a foreign resident – Australian resident beneficiary

    Edwina purchased an Australian residential property on 7 February 2011 and moved into it shortly after. It was Edwina's main residence until 25 September 2016 when she moved to Johannesburg and rented it out.

    On 20 January 2018, Edwina passed away. At the time of her death, she was a foreign resident. As Edwina had been a foreign resident for less than six years when she died, her estate and beneficiaries are eligible for the main residence exemption for the dwelling.

    Rebecca, an Australian resident, inherited the dwelling from Edwina. Rebecca sold the dwelling within two years, and was able to access the main residence exemption that Edwina had accrued for the period she owned the property.

    End of example

    Example: Inherit dwelling from a foreign resident more than six years – Australian resident beneficiary

    Michael acquired an Australian residential property on 16 September 2010 and lived in it as his main residence. On 1 July 2013 Michael moved to New York and rented out his Australian property.

    On 16 August 2020, Michael passed away. At the time of his death, he had been a foreign resident for more than six years. This means Michael was not eligible for the main residence exemption despite having occupied the property from 16 September 2010 to 30 June 2013.

    Anita, an Australian resident, inherited the dwelling from Michael. Anita did not live in the property and sold it within two years. She was not able to access the main residence exemption because Michael was a foreign resident for more than six years. This meant he was not entitlement to the exemption. Anita had to declare the capital gain in her tax return and pay CGT.

    End of example

    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, such as the main residence exemption may apply in part or 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 such as 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, which 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.

    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 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 2018 leaving two assets. She left a parcel of 2,000 shares in Bounderby Ltd. and a vacant block of land. The executor of the estate and legal personal representative was Giovanni.

    Giovanni disregarded any capital gain or loss upon the transfer of the assets. He sold the shares to pay Maria's outstanding debts. The transfer of shares was not to a beneficiary therefore Giovanni must include any capital gain or loss on this disposal in the tax return for Maria's deceased estate.

    Giovanni transferred the land to Maria's beneficiary, Antonio, and paid the conveyancing fee of $5,000 upon payment of all debts and tax. We disregard any capital gain or loss to date in the transfer of land to a beneficiary. We take the first element of Antonio's cost base as Maria's cost base on the date of her death. Antonio can include the $5,000 Giovanni spent on the conveyancing in his cost base.

    End of example

    Choosing a calculation method

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

    The method used depends on:

    • when you acquired the asset
    • 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 the deceased 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 2018. 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 under the indexation method she is taken to have acquired it on 14 November 1998 which is 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: 20 Jan 2020QC 52245