Assets passing to a Beneficiary or Legal Representative
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 capital gains tax (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 apply.
DATE OF ACQUISITION
If one acquires an asset owned by a deceased person as their legal personal representative or beneficiary, they have acquired the asset on the day the person died. If that was before 20 September 1985, any capital gain or capital loss is disregarded.
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.
COST BASE OF ASSET
If the deceased person acquired their asset before 20 September 1985, the first element of the 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 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 (indexed where relevant) and reduced cost base, respectively, of the asset on the day the person died.
If the deceased person died before 21 September 1999 and when you dispose of the asset (or when another CGT event happens), you choose the indexation method to work out the capital gain, 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 have to 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 the 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.
COLLECTABLES AND PERSONAL USE ASSETS
A post-CGT asset that is a 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.
INHERITING A DWELLING
If you inherit a deceased person's dwelling, you may be exempt or partially exempt when a capital gains tax event happens in relation to it. The same exemptions apply if a CGT event happens in relation to a deceased's estate of which you are the trustee.
This information does not apply to a share of a property you acquire on the death of a joint tenant. Different rules apply in that situation. Similarly, the rules below do not apply to land or a structure you sell separately from the dwelling. They are subject to capital gains tax.
WHAT HAPPENS TO ASSETS WHEN THE OWNER DIES?
If you are a deceased person's legal personal representative or a beneficiary of a deceased estate, special capital gains tax rules apply to the transfer of any CGT assets.
When a person dies, the assets that make up their estate can:
a) Pass directly to a beneficiary (or beneficiaries), or
b) 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 because of the laws of intestacy (when the person does not make a will).
A legal personal representative can be either:
a) The executor of a deceased estate (that is, a person appointed to wind up the estate in accordance with the will), or
b) An administrator appointed to wind up the estate if the person does not leave a will.
DISREGARDING CAPITAL GAIN OR LOSS ON DEATH
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:
a) To their legal personal representative or to a beneficiary, or
b) 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 in relation to the asset just before the person dies. The CGT event will result in:
a) A capital gain if the market value of the asset on the day the person dies is more than the cost base of the asset, or
b) A capital loss if the market value is less than the asset's reduced cost base.
However, any capital gain or capital loss from a testamentary gift of property can be disregarded if the gift is made:
a) Under the Cultural Bequests Program (which applies to certain gifts of property-not land or buildings-to a library, museum or art gallery), or
b) 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.
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).
A tax-advantaged entity is:
a) A tax-exempt entity (for example, a church or charity), or
b) The trustee of
A complying superannuation fund
A complying approved deposit fund, or
A pooled superannuation trust
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:
a) Deceased was an Australian resident when they died
b) 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.
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.
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 tenants. 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 capital gains tax 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.
CGT & JOINT TENANTS
A and B acquired land as joint tenants before 20 September 1985. A died in October 2004. For CGT purposes, B is taken to have acquired A's interest in the land at its market value at the date of his death.
B 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 A's death.
If B sold the land within 12 months of A's death, she would still 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 A's interest at the time when he acquired it, which was before 20 September 1985.
RECORDS RELATING TO INHERITANCE
When you inherit an asset as a beneficiary of the estate of a person who died on or after 20 September 1985, you must keep special records. These records for varying situations are as follows:
a) If the deceased person acquired the asset before 20 September 1985, you need to know the market value of the asset at the date of the person's death and the amount of any relevant costs incurred by the executor or trustee. This is the amount that the asset is taken to have cost you. If the executor or trustee has a valuation of the asset, get a copy of that valuation report. Otherwise, you will need to get your own valuation.
b) If the deceased person acquired the asset, you inherit on or after 20 September 1985, you need to know full details of all relevant costs incurred by the deceased person and by the executor or trustee. Get those details from the executor or trustee. Even if you inherit a house that was the family home of the deceased person, you need to keep records of costs paid by the deceased person in case you are not able to claim a full exemption for the house after you inherit it.
If, after 20 August 1996, you inherit a house that was the family home of the deceased and it was not regarded as being used to produce income at the time of death, you will be taken to have acquired the house at its market value at the date of death. If the executor or trustee has a valuation of the asset, get a copy of that valuation report. Otherwise, you will need to get your own valuation. Make sure you keep details of any other costs you have paid out for the asset since the date you
CALCULATING CAPITAL GAINS TAX ON ASSETS ACQUIRED FROM A DECEASED ESTATE
If you become the beneficiary (or legal personal representative) of a deceased estate before 11.45am (by legal time in the ACT) on 21 September 1999 and dispose of a capital gains tax asset that you inherited after that time and 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. The discount method is only available if you are an individual, a trust, or a complying superannuation entity.
As a general rule, elements of the cost base of an asset can be indexed if you own the asset for at least 12 months before disposing of it. However, if you receive an asset from a deceased estate, the 12-month period is calculated from the time the deceased acquired the asset, 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
-Post-CGT assets, the date the deceased acquired it.
TRANSFER OF AN ASSET FROM THE EXECUTOR TO A BENEFICIARY
C died on 13 October 2000 leaving two assets: a parcel of 2,000 shares in ABC Ltd and a vacant block of land. D was appointed executor of the estate (the legal personal representative).
When the assets are transferred to D, any capital gain or capital loss is disregarded. D disposes of (sells) the shares to pay C'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 C's deceased estate.
When all debts and tax have been paid, D transfers the land to C's beneficiary, E, 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 E's cost base is taken as C's cost base on the date of her death. E is also entitled to include in his cost base the $5,000 D spent on the conveyancing.
INDEXATION AND CGT DISCOUNT
F acquired a property on 14 November 1998 for $126,000. He died on 6 August 1999 and left the property to G. She sold the property on 6 July 2004 for $240,000. The property was not the main residence of either F or G. Although G acquired the property on 6 August 1999, for 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 F acquired it).
At the time of disposal, G is taken to have 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, G 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 G 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 F up until the time he died.