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  • Chapter 9 - Deceased estates

    Attention

    Warning:

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

    End of attention

    If you are a deceased person's legal personal representative or a beneficiary of a deceased estate, read this chapter to find out about the special capital gains tax (CGT) rules that apply.

    New terms

    We may use some terms that are new to you. These words are explained in Definitions. Generally they are also explained in more detail in the section where they first appear.

    When a person dies, the assets that make up their estate can:

    • pass directly to a beneficiary (or beneficiaries), or
    • pass directly to their legal personal representative (for example, their executor) who may dispose of the assets or pass them to the beneficiary (or beneficiaries).

    A beneficiary is a person entitled to assets of a deceased estate. They can be named as a beneficiary in a will or they can be entitled to the assets as a result of the laws of intestacy (when the person does not make a will).

    A legal personal representative can be either:

    • the executor of a deceased estate (that is, a person appointed to wind up the estate in accordance with the will), or
    • an administrator appointed to wind up the estate if the person does not leave a will.

    Capital gain or capital loss on death is disregarded

    There is a general rule that CGT applies to any change of ownership of a CGT asset, unless the asset was acquired before 20 September 1985 (pre-CGT).

    There is a special rule that allows any capital gain or capital loss made on a post-CGT asset to be disregarded if, when a person dies, an asset they owned passes:

    • to their legal personal representative or to a beneficiary, or
    • from their legal personal representative to a beneficiary.
    Exceptions to this rule

    A capital gain or capital loss is not disregarded if a post-CGT asset owned at the time of death passes from the deceased to a tax-advantaged entity or to a non-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, or
    • a 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).

    However, any capital gain or capital loss from a testamentary gift of property can be disregarded if:

    • the gift is made under the Cultural Bequests Program (which applies to certain gifts of property - not land or buildings - to a library, museum or art gallery), or
    • the gift is made to a deductible gift recipient or a registered political party 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:

    • 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.
       
    Non-resident beneficiary

    If a non-resident is a beneficiary of a deceased's post-CGT asset, any capital gain or capital loss is not disregarded if:

    • the deceased was an Australian resident when they died, and
    • the asset does not have the necessary connection with Australia.

    Examples of assets that do not have the necessary connection with Australia include:

    • real estate located overseas
    • shares in a non-resident company, and
    • shares in an Australian public company if the total number of shares owned is less than 10% of the value of shares in the company.

    Assets which pass to the beneficiary or legal personal representative

    Main residence

    Special rules apply if the asset was the deceased person or beneficiary's main residence (see Inherited main residence).

    Other assets

    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 capital loss they make on disposal of that asset to the beneficiary is subject to the normal CGT rules.

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

    Acquisition of asset

    If you acquire an asset owned by a deceased person as their legal personal representative or beneficiary you are taken to have acquired the asset on the day the person died. If that was before 20 September 1985, you disregard any capital gain or capital loss you make from the asset.

    Cost base of asset

    If the deceased person acquired their 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.

    The beneficiary or legal personal representative is taken to have acquired the improved asset when the person died. Although the deceased used to treat the asset and the improvement as separate assets, the beneficiary or legal personal representative now treats them as one asset.

    If a deceased person acquired their asset on or after 20 September 1985, the first element of your cost base and reduced cost base is taken to be the cost base and reduced cost base of the asset on the day the person died. If the deceased person 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 person died on or after 21 September 1999, you cannot 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.

    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 (for example, the executor) 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.

    Choosing the indexation method or the discount method

    If the deceased died before 11.45am (by legal time in the ACT) on 21 September 1999 and you dispose of the asset (as legal personal representative or beneficiary) after that date, there are two ways of calculating your capital gain. You can use either the indexation method or the discount method, whichever gives you the better result. However, the CGT discount is only available if you are an individual, a trust or a complying superannuation entity.

    Elements of an asset's cost base can be indexed only if you own the asset for at least 12 months before disposing of it. For the purposes of this 12-month ownership test you are taken to have acquired the asset when the deceased acquired it, not from the date of their death.

    For the CGT discount to apply, you must have acquired the asset at least 12 months before disposing of it. For the purposes of this 12-month ownership test, you are taken to have acquired the asset at one of the following times:

    • for pre-CGT assets, the date the deceased died, and
    • for post-CGT assets, the date the deceased acquired it.

    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 ABC Ltd and a vacant block of land. Giovanni was appointed executor of the estate (the legal personal representative).

    When the assets are transferred to Giovanni, he disregards any capital gain or capital loss. Giovanni disposes of (sells) the shares to pay Maria's outstanding debts. As the shares are not transferred to a beneficiary, any capital gain or capital loss on this disposal must be included on the tax return for Maria's deceased estate.

    When all debts and tax have been paid, Giovanni transfers the land to Maria's beneficiary, Antonio, and pays the conveyancing fee of $5,000. As the land is transferred to a beneficiary, any capital gain or capital loss 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

    Example: Indexation and CGT discount

    Leonard acquired a property on 14 November 1998 for $126,000. He died on 6 August 1999 and left the property to Gladys. She sold the property on 6 July 2004 for $240,000. 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 was taken to have acquired it on 14 November 1998 (the day Leonard acquired it).

    At the time of disposal, Gladys has owned the property for more than 12 months. As she 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 chose the discount method she would have to exclude from the first element of her cost base the amount that represented indexation that had accrued to Leonard up until the time he died.

    End of example
    Collectables and personal use assets

    A post-CGT collectable or personal use asset is still treated as such when you receive it as a beneficiary or the legal personal representative of the estate.

    Joint tenants

    If two or more people acquire a property asset together, it can be either as joint tenants or as tenants in common.

    If one of the joint tenants dies, their interest in the property passes to the surviving joint tenant(s). It is not an asset of the deceased estate.

    If a tenant in common dies, their interest in the property is an asset of their deceased estate. This means it can be transferred only to a beneficiary of the estate or be sold (or otherwise dealt with) by the legal personal representative of the estate.

    For CGT purposes, if you are a joint tenant, you are treated as if you are a tenant in common owning equal shares in the asset. However, if one of the other joint tenants dies, on that date their interest in the asset is taken to pass in equal shares to you and any other surviving joint tenants, as if their interest is an asset of their deceased estate and you are beneficiaries.

    The cost base rules relating to other assets of the deceased estate apply to their interest in the asset or the equal share of it which passes to you and any other surviving joint tenants.

    For the indexation and discount methods to apply, you must have owned the asset (or your share of it) for at least 12 months. As a surviving joint tenant, for the purposes of this 12-month test, you are taken to have acquired the deceased's interest in the asset (or your share of it) at the time the deceased person acquired it.

    Example: CGT and joint tenants

    Trevor and Kylie acquired land as joint tenants before 20 September 1985. Trevor died in October 2004. For CGT 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% interest as a pre-CGT asset, and the inherited 50% 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 qualify for the CGT discount on any capital gains she makes on her post-CGT interest. She qualifies for the CGT discount because, for the purposes of the 12-month ownership test, she is taken to have acquired Trevor's interest at the time he acquired it, which was before 20 September 1985.

    End of example
    Unapplied net capital losses

    If the deceased had any unapplied net capital losses when they died, these cannot be passed on to you as the beneficiary or legal personal representative for you to offset against any net capital gains.

    Last modified: 09 Apr 2020QC 27596