Summary - Capital Gains Tax (CGT) was
introduced on 20 September 1985 and is sometimes described as a
"back door death duty". Is this so?
Death is not a chargeable event and a beneficiary inherits the
deceased's cost base i.e. the price the deceased paid for the
asset. If the asset was purchased prior to 20 September 1985, the
cost base is the open market value of the property at the date of
death. Thus, any accrued gain is ignored due to the uplift in
value. Contrast, where an asset is acquired post 20 September 1985;
here the cost base is the deceased's purchase price. Any gain
is rolled over on death and CGT will only be payable if and when
the beneficiary disposes of the asset.
Meet Mary Gregory.
Mary has two children, Kate and Amanda.
Her assets comprise:
principal residence $2 million;
investment property purchased in 1986 for $150,000.00 now worth
approximately $3 million;
holiday house purchased in 1980 for $100,000.00 now worth
approximately $3 million;
cash $2 million.
Mary wants to treat her daughters equally and decides to
distribute her assets as follows:
investment property to Kate;
holiday house to Amanda;
divide remaining balance equally between Kate and Amanda.
What is the issue? On the surface, it appears the daughters
will be treated equally but is this the case? The answer is no due
to the fact that the investment property is a post-CGT asset
whereas the holiday house is a pre-CGT asset.
Kate's cost base for CGT purposes will be $150,000.00
whereas Amanda's will be $3 million. Thus, if both daughters
decided to sell their properties say 6 months after their
mother's death Amanda would receive approximately $3 million
tax free whereas her sister would pay CGT at her personal tax rates
on the in-built gain.
How can this be addressed? The Will could provide for Kate to
receive an additional cash sum from the Estate to compensate for
the in-built capital gain. Alternatively, Mary could simply split
her Estate equally between her daughters meaning they would share
equally any CGT.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).