CGT Consequences for an Estate

tax law|Wills and Estates: 23 March 2019

Many people fail to consider the Capital Gains Tax (CGT) consequences that can arise after their death, some of which can have a massive impact on the estate itself.  Imagine a scenario where a person owns a large portfolio of shares and wishes to bequeath the shares equally between his or her two children. In today's globalised economy it is quite possible that one or even both of those children lives overseas and is a non-resident of Australia.

We will consider that one child lives in Australia, the other lives overseas, and that all the shares have been acquired in the 1990s and 2000s.

Under this scenario, the resident beneficiary will receive the shares at their original cost and acquisition date of the parent. However, as the other child is a non-resident the death of the parent results in a capital gains event for that half of the share portfolio at the date of death. The executor of the Estate will be responsible for paying the resulting tax and there may not be enough cash in the Estate to pay the tax.

Some of the shares that pass to the non-resident beneficiary may need to be sold to meet the potentially large tax liability. This triggers a second CGT event, but under Australian tax law, the non-resident beneficiary should not be taxed on this event but may be taxed in their country of residence. Alternatively, some of the resident beneficiary's shares could be sold to meet the liability but this would result in a situation where the non-resident owes the resident an amount equal to the tax paid, a recipe for possible friction between them.

You will see from the scenario that drafting a will may have unintended effects. Ideally, Estate planning should take taxation consequences of the disposal of assets to beneficiaries into account to minimise the taxation impact on the beneficiaries. If you believe this is a situation that applies to you, we have accountants with wide experience in taxation planning who can help you.