Q & A – Do I Have to pay Capital Gains Tax on my assets once I have passed away?

Posted on 17th June 2020 by Christabelle Harris

Q: If my assets are transferred to my beneficiaries once I pass away, do I or my beneficiaries have to pay capital gains tax on that transfer of ownership?

A:  Death does not in itself constitute a disposal for capital gains tax purposes even though there is clearly a change in ownership of the assets as they pass from the deceased to the executor ( of the deceased estate) and ultimately to the beneficiary.  That is, death will not cause a capital gains tax liability to arise.

Section 128-15 of the Income Tax Assessment Act 1997 provides the particular rules by which a beneficiary or executor will acquire any asset for the purposes of calculating any subsequent capital gains tax that may arise through a future sale or other disposal by that person.  This section recognises two types of assets from the perspective of the deceased:

• Pre-CGT assets and
• Post-CGT assets

It’s important for the beneficiary/executor to understand what type of asset (Pre or Post CGT) they have received from the deceased estate as it changes the CGT liability payable on the asset if the beneficiary/executor chooses to sell/dispose of the asset in the future.

Q: I have accumulated carried-forward capital losses over the years – can’t my beneficiary/s just use this to offset any capital gain in the future?

A: Unfortunately, capital losses die with the taxpayer. If the deceased had any unapplied net capital losses when they died, these cannot be passed on to the beneficiary or executor.  A realised capital loss of the deceased cannot:

• Be used in the first return of the estate to offset any gain made by the deceased estate;
• Be passed on to beneficiaries; or
• Offset other income for the period 1 July to the date of death.

Losses can only be used against capital gains made on CGT assets prior to death.

Q: What is a Pre-CGT asset and a Post-CGT asset? 

A:  Capital Gains Tax is a piece of tax legislation that was introduced on 19 September 1985. A Pre-CGT asset is an asset that was acquired prior to 19 September 1985 and therefore the new CGT laws did not apply to it. Subsequently, a Post-CGT asset is an asset that was acquired after 19 September 1985.

Example: An asset, such as a house, that was purchased before 19 September 1985 (Pre-CGT asset) and then sold many years later in 2015 would more than likely result in a hefty capital gain. However, because the asset was Pre-CGT, NIL CGT was payable on the proceeds.

Q: I have a Pre-CGT asset. Does that mean that my beneficiary doesn’t have to pay CGT on that asset if they dispose/sell that asset in the future?

A: In the majority of cases however the sale of assets post-death by the executor or beneficiary will result in the triggering of a capital gains tax event in the next generation in the usual manner. The efficient estate tax planning issues adopted by a will-maker now may greatly impact upon the tax paid by their children/beneficiaries in the future.

From the above brief analysis it can be seen that there is an easy way to avoid capital gains tax: never sell, gift or otherwise dispose of capital gains taxable assets apart from through the will, simply continue to gift assets from one generation to the next.  This observation may be correct, it is however, impractical.

It is more important to recognise that the design of the capital gains tax will shift the tax liability to the next generation and within one lifetime all assets in Australia will become subject to capital gains tax.

How? When a Pre-CGT asset is transferred to a beneficiary, the executor or beneficiary of the estate is deemed to have acquired the asset on the deceased’s date of death for the market value of the asset on the date of death. Thus, the Pre-CGT asset is transferred into a Post-CGT asset at the date of death.

Where the asset was Post-CGT, the executor or beneficiary of the estate will receive that asset with the same capital gains tax cost base as that held by the deceased. In other words, it would be as though the executor or beneficiary who has subsequently sold the asset and crystallised any capital gains tax liability, had held it from the date it was first acquired by the deceased.

Should you have any queries regarding the above information, please do not hesitate to contact us on (08) 9316 7000.