It has become increasingly common, for younger Australians to travel overseas for study, work and lifestyle, quite often turning a ‘gap year’ into a permanent relocation abroad and with Australia at the forefront of the largest intergenerational wealth transfer, it is important to be aware of the potential tax traps associated with the transfer of wealth via deceased estates to non-resident beneficiaries.
It is commonly understood that Australia does not have a direct death or inheritance tax. As generally speaking where assets pass to beneficiaries through a deceased estate, capital gains is typically disregarded until such point in time as that asset is disposed of by recipient beneficiaries. The one exception is where assets of an estate classified as ‘Non-Taxable Australian Property’ pass to a tax-advantaged entity, such as a foreign resident which inadvertently triggers CGT event K3 contained in section 104-215 of the Income Tax Assessment Act of 1997.
Examples of non-Taxable Australian Property (TAP) assets include:
- listed shares
- shares in private companies
- units in unit trusts
The key mandate for CGT event K3 is to effectively capture income tax due on the unrealised and incremental capital growth of the CGT asset to ensure tax is captured on the asset prior to the asset leaving the CGT system without any tax consequences. This provision deems a Capital Gains Tax event to have occurred at the date of death of the deceased, using the deceased cost base and market value of the asset at the deceased date of death as basis for the capital gains calculation.
The reporting of the capital gains is provisioned for via the deceased date of death return and ultimately paid for by the Legal Personal Representative (LPR).
The key issue to highlight the impact of CGT event K3 is the inherit mismatch between the foreign resident beneficiary who receives the CGT assets and the parties that bear the tax liability due to the fact payment of the tax liability reduces the balance of funds available for distribution by the estate.
It is important to be aware of and understand the tax implications that can arise from how you choose to leave your estate and the potentially burdensome financial impacts your family may need to deal with. In a time of careful planning and consideration, the application of CGT Event K3 can be managed or perhaps altogether avoided.
Worked Example
Cameron (Father) passes away and leaves his estate to his two children, Frank and Eva. Frank is an Australian resident who has always resided in Australia and currently has significant amounts of personal debt. Eva currently lives and resides in New Zealand and has done so for the past 30 years and has a key passion for stocks and investing.
The Estate consists of $200,000 in cash and a diverse share portfolio with a market value of $200,000 (cost base of $120,000). The estate is to be split evenly between the two beneficiaries.
Whilst it may seem logical for Frank to receive the cash (to reduce debt) and Eva to receive the shares (in pursuit of her investing passion) given Eva is a foreign resident, it would be more beneficial to seek an alternate outcome such as for Eva to receive the cash component as opposed to the share portfolio to avoid triggering CGT event K3 and avoiding the requirement to fund the notional disposal of the shares at market value at date of death.
This article has not considered the tax implications for your non-resident beneficiaries in the relevant overseas jurisdiction(s). We recommend speaking with your local Accru advisor to discuss the specific tax advice in those jurisdiction(s).
