The taxation of estates can be quite complex depending upon the assets held by the deceased. For complex estates, it is important for the executor to have an understanding of relevant taxation principles. An executor’s choices when administering an estate can have a significant effect on the amount of tax paid and who pays the tax.
Capital gains tax is the tax paid on the disposition of most assets acquired on or after 20 September 1985. All assets are subject to capital gains tax unless there is a specific exemption for them. Most commonly, capital gains tax is triggered by the sale of real estate or shares. Capital gains tax is not a separate tax. Rather, it is one element of income tax. The tax rate will therefore depend upon the individual’s income for that taxation year.
In general terms, the capital gain on an asset is simply the difference between the sale proceeds and what it cost to acquire the asset. The cost of the asset includes the amount initially paid for the asset, but it can also include other types of costs. If assets are held for less than one year before they are sold, the entire amount of the gain must be declared as income on the annual tax return. If the asset was held for one year or more, only 50% of the gain must be included as income.
Executors must have regard to when the deceased acquired the asset. Special rules apply to assets acquired after 20 September 1985 but before 21 September 1999. For assets purchased during this period, the executor will need to determine whether it is more advantageous to elect to index the cost base of the asset rather than reduce the capital gain by 50%.
Generally, capital gains tax is triggered when an asset is transferred. However, special capital gains tax rules apply to the transfer of assets to an executor or a beneficiary. When a person dies, assets can either pass directly to a beneficiary or they can pass to an executor who may then dispose of the assets or pass them to a beneficiary. There is a special rule that allows capital gains to be disregarded on death where the asset passes to an executor or a beneficiary, or from an executor to a beneficiary.
Capital gains tax is triggered by:
• gifts of property acquired by the estate after death, unless the gift satisfies a general legacy under the will; and
• gifts of estate assets to non-residents, superannuation funds and some tax exempt entities (for example, charities or churches).
In most other cases, capital gains tax is deferred until the asset is sold. Typically the beneficiary must include the capital gain in his or her tax return for the year of sale. However, the estate may be responsible for paying capital gains tax if the estate sells the asset before the year in which administration of the estate is complete.
There are some exemptions to capital gains tax. Generally, capital gains tax is not triggered by the sale of the deceased’s main residence. There is a full exemption provided that either:
• the residence is sold within two years of the death; or
• the residence continues to be occupied by the deceased’s spouse, by an individual who has a right to occupy the residence under the will, or by the beneficiary.
However, there are a number of exceptions to these principles and executors should seek advice in this regard. In some situations, a partial exemption may apply. Further, special tax rules may apply even if real property was not the deceased’s main residence, resulting in a full or partial exemption from capital gains tax.
There are other exemptions from capital gains tax. Capital gains tax is not payable in relation to personal use assets purchased for less than $10,000. This includes assets which are used or kept primarily for the personal use or enjoyment of the individual of their associates. This does not include collectables or land. Collectables are assets such as art, jewellery, rare folios, manuscripts, books, postage stamps, coins, medallions and antiques. Generally, capital gains tax is not payable in relation to a collectable if the price and market value of the asset was $500 or less.