Who Pays Capital Gains Tax on a Deceased Estate in Australia?
Who pays capital gains tax (CGT) on a deceased estate will depend on the timing of the sale.
As there is no inheritance tax in Australia, the transfer of an asset from the estate to a beneficiary does not trigger a CGT liability. However, the beneficiary may need to pay CGT later if they sell or transfer the property.
If the executor sells assets during the estate administration (either because the will requires the sale or the executor needs to sell the asset to realise funds to pay debts) the sale may trigger a CGT liability which the estate needs to pay.
This short guide explains who pays CGT on inheritance, when tax is triggered, available exemptions, and how to potentially reduce deceased estate tax legally under the Australian capital gains tax framework.
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When Is Capital Gains Tax (CGT) Payable on a Deceased Estate?
When a person dies, the executor (or if there is no will an “administrator”) is responsible for collecting the assets, paying the debts and distributing the balance of the estate in accordance with the will or where there is no will, in accordance with the laws of intestacy.
Where an asset is transferred directly from the estate to a beneficiary, the transfer will not usually give rise to CGT. However, CGT may be payable when the beneficiary later sells the property.
Where the executor or administrator sells an asset during administration of the estate, the estate may be subject to CGT on the sale. The amount of CGT payable depends on the cost base and capital proceeds of the asset, and any CGT exemptions that apply (i.e. main residence tax exemption).
Who Is Responsible for Paying CGT on Estate Assets?
- If the estate sells: the executor reports the gain or loss in the estate tax return.
- If a beneficiary sells: the beneficiary reports the gain or loss in their tax return.
Executors should obtain advice before selling assets as the sale of assets could result in a tax liability to the estate which must be paid by the estate.
Equally, beneficiaries who inherit assets should seek advice on what, if any, CGT liability may arise if they later dispose of the property.
How CGT Exemptions Apply to Inherited Property
- Main residence exemption and two-year rule: a home in Australia can be CGT-free where it is the person’s main residence. The property needs to be sold within 2 years of the deceased’s death to maintain the main residence exemption.
- Pre-CGT assets: if the deceased acquired the home before 20 September 1985, a full exemption will usually apply.
Main Residence Exemption Rules
A full CGT exemption (known as the main residence tax exemption) may apply if the dwelling was the deceased’s home for the entire period of ownership. A full exemption is commonly available if the property is sold within the two-year period, or if from death until sale it was the main residence of the spouse, a beneficiary, or a person with a right to occupy under the will.
Time Limits for CGT Exemptions
A main residence must be sold within two years from the deceased’s date of death in order to maintain the principal place of residence tax exemption.
The ATO may grant extensions if the delay is beyond reasonable control. Common reasons put forward for extensions include probate delays, disputes, life interests, complex conveyancing, or settlement issues. Estates or tax payers may apply to the ATO for extensions.
Partial CGT Exemptions on Inherited Assets
Even if a full exemption is not available, a partial CGT exemption may still be available. An example includes where a deceased used a property as both a main residence and an investment property at different periods throughout their ownership.
Keeping accurate records of occupancy, rental days, and expenses is important to ensuring the estate and beneficiaries can achieve the best tax outcome.
How to Minimise CGT on a Deceased Estate
If the property was the deceased’s main residence throughout the entire period of ownership, the estate will enjoy a main residence tax exemption if the property is sold within 2 years of death. Therefore, it is particularly important that the executor acts promptly where the deceased died owning a main residence.
If the property was a main residence, it may be unfavourable to use the property for income producing purposes after death.
Good record keeping can help increase the cost base, obtaining valuations to support arguments, and maintaining records of all outgoings including legal and selling costs can all help achieve a more favourable tax outcome.
Another option to minimise CGT consequences is to consider the use of testamentary trusts for long-term estate planning.
Transferring Assets Without Triggering CGT
The transfer of assets by executors to beneficiaries or testamentary trusts is not usually subject to CGT.
However, a later sale of the asset by the beneficiary or the testamentary trust will trigger a CGT event and tax may be payable on any capital gain.
Need Legal Advice on Wills and Estates in NSW? Contact Us Today
Empower Wills and Estate Lawyers advises executors and beneficiaries on all aspects including capital gains tax liabilities in deceased estates, CGT inherited property, CGT exemptions, and preferred sale timing. When providing estate planning services, we aim to provide tax effective outcomes for your beneficiaries. When providing probate services, we will work with your accountant to minimise the estate’s tax liabilities within the ATO framework. For clear guidance on Australian CGT deceased estate matters, call 1300 414 844.
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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.
