Understanding Tax Exemptions and Partial Exemptions

Whether an exemption or partial exemption applies to an asset depends on the nature of the asset and other circumstances. 

Some assets may enjoy a full exemption from tax, while others may enjoy a partial exemption. 

How to Qualify for Exemptions on Inherited Property

When we refer to an exemption, we are referring to an exemption from capital gains tax (CGT). 

CGT is a tax that may be payable to the Australian Taxation Office upon the sale or disposal of an asset, such as real estate, shares, or other assets. The rate of capital gains tax payable will depend on the nature of the asset, the original purchase cost, the period of ownership and holding costs throughout the period of ownership, the sale price, how the property was held, and many other factors. The CGT of a property is determined by an accountant and declared in a person’s tax return. 

Some estate assets may enjoy a full CGT exemption while others may enjoy a partial exemption. 

One example of an asset that may enjoy a full exemption from CGT is the deceased’s main residence. If the deceased’s main residence was used by the deceased as their main residence throughout their entire period of ownership, the property will usually be exempt from CGT if sold by the executor or beneficiaries within two years from the deceased’s death. In this case, neither the estate nor the beneficiaries will have to pay capital gains tax on the sale proceeds. 

Therefore, using property as your main residence can have future tax benefits for both you and your beneficiaries. 

Partial Exemptions and Their Role in Minimising Taxes

If a particular asset does not satisfy the criteria for a full exemption, it may still be entitled to a partial exemption. 

Leveraging Super Death Benefits to Pay Less Inheritance Tax

Another asset that is usually the subject of professional tax advice is superannuation. 

Superannuation is an asset that is held in trust for the member’s retirement. In most cases, when the member dies, the balance of their superannuation account can be paid to their chosen beneficiaries. Depending on the particular fund, the member will have the option to prepare a Death Benefit Nomination Form within which they can nominate their chosen beneficiaries. 

However, payments to beneficiaries may be subject to tax depending on several factors, including the composition of the actual super itself (i.e. taxable component, non-taxable component), the class of beneficiary (as some beneficiaries are subject to tax and others are exempt), and of course, the personal income tax rate of the particular beneficiary. 

It is important to factor superannuation and any life insurance policies into the estate planning process to help ensure the most favourable tax outcomes for you and your beneficiaries. 

The Role of Testamentary Trusts in Tax Planning

Testamentary Trusts can be beneficial for tax planning purposes. 

A Testamentary Trust is a trust that is established upon a person’s death under the terms of their will. 

Unlike trusts established during a person’s lifetime, such as family discretionary trusts, which do not enjoy favourable tax rates when distributing income to minors, Testamentary Trusts do enjoy favourable tax rates. What this means is that income from an estate can be paid to minor children who, when lodging their tax returns, would be taxed at marginal tax rates, including any tax-free threshold and other offsets that may apply. Therefore, a testamentary trust can help reduce tax paid after death. 

As a Testamentary Trust is more complex than a standard will, setting up a trust will usually cost more. After a person dies, a Testamentary Trust may also have higher ongoing costs than an estate that is subject to the terms of a will. Therefore, whilst Testamentary Trusts are generally available to everyone, the establishment costs to set up the trust and ongoing costs are sometimes prohibitive.

Gifting Assets Before Death

Another factor to consider when preparing your estate plan is whether it is beneficial for tax purposes to gift assets to beneficiaries during your lifetime before you die, rather than having them pass to your beneficiaries after your death and being subject to estate taxes at a later date. 

However, in some circumstances, the gifting of assets before you die may actually have unintended legal or tax consequences and trigger capital gains tax or stamp duty. 

Whether or not it is appropriate to divest yourself of assets before you die will depend on your specific circumstances. Therefore, it is important to seek professional advice before you dispose of the property to ensure you understand the extent of any potential tax obligations that may arise in your specific circumstances. 

Tax Implications of Transferring Wealth to Beneficiaries

The transfer of wealth to beneficiaries can have tax implications. It is therefore important to seek advice from experienced professionals who hold the relevant expertise for your purposes, such as a lawyer, an accountant, and a financial adviser. It may also be necessary to take into account the circumstances of the person or persons who will inherit a property during the estate planning process. 

Managing Capital Gains Tax on Inherited Property

Managing CGT on inherited property will depend on many factors, including but not limited to the nature of the asset, it acquisition price, its sale price, the period of ownership, and the legatee’s personal tax circumstances. 

Seeking Legal Advice From Empower Wills and Estate Lawyers

If you are seeking advice on ways to reduce the tax for your beneficiaries, or you have been named executor and trustee and need help to apply for probate, contact the estate planning team at Empower Wills and Estate Lawyers on 1300 414 844 today.

Our dedicated team can help you navigate your personal and financial complexities and financial matters, protect your assets, and help ensure that your assets go to those whom you choose and that your wishes are honoured. We offer personalised advice and flexible fee structures tailored to your needs. Contact us today to schedule a consultation to put a plan in place and secure your peace of mind.

Liability limited by a scheme approved under Professional Standards Legislation.

Disclaimer: the information in this article relates to NSW law as at the date it was written and is general information only. It does not constitute legal advice and should not be relied upon as legal advice. It may contain information or links to sources which are no longer current. If you have a question or legal issue, we recommend you contact a lawyer and obtain legal advice that takes into account your specific facts, circumstances, needs and objectives.