Anthony J Cordato
, Principal at Cordato Partners, in the second part of his Death and Taxes series, examine the new taxes that tax wealth on death which have replaced inheritance taxes. Read Part 1 here.
When a tax is abolished, often a new tax is introduced to fill the revenue gap.
So it was that not long after the abolition of death duty and estate duty, a capital gains tax was introduced in 1985. Capital Gains Tax is a fairer tax than an inheritance tax because it taxes the capital gain, not the capital itself, when an asset is transferred. But it is still a tax!
When introducing the tax in 1985, the Treasurer took care to avoid it being seen as a new inheritance tax, coming so soon after the abolition of death duty and estate duty:
“The Government has decided that the deemed realisation at death proposal, outlined in the draft White Paper, will not apply. Liability for tax in the case of death will be rolled over to successors, and will only be assessed on any subsequent disposal. Therefore the capital gains tax will not apply in the case of death. … [also] a complete exemption will apply to gains on the taxpayer’s principal residence and reasonable curtilage” [Ministerial Statement by P.J. Keating on Reform of the Australian Taxation System 19 September 1985]
This is an outline of the legislation:
Capital Gains Tax (CGT) is payable when you dispose of an asset. Section 104.10 of the Income Tax Assessment Act 1997 (Cth) provides:
“(1) CGT event A1 happens if you dispose of a CGT asset.
(2) You dispose of a CGT asset if a change of ownership occurs from you to another entity”
Section 128.10 makes clear that capital gains tax is not payable in the case of death:
“When you die, a capital gain or capital loss from a CGT event that results for a CGT asset you owned just before dying is disregarded.”
Section 128.15 provides details:
“(1) … what happens if a CGT asset you owned just before dying:
(a) devolves to your legal personal representative; or
(b) passes to a beneficiary in your estate.
(2) The legal personal representative, or beneficiary, is taken to have acquired the asset on the day you died.
(3) Any capital gain or capital loss the legal personal representative makes if the asset passes to a beneficiary in your estate is disregarded.”
Australia is an exception in not treating death as a CGT event. In other countries where inheritance taxes have been abolished, death is treated as a capital gains taxing point for capital gains tax purposes.
In Australia, the taxing point comes later, when the inherited asset is sold.
The family home is exempt from CGT, even if it is sold after death, provided it is sold within 2 years of death. There is no need for a sale if the family home continues to be occupied by a person who inherits the family home because the main residence exemption from CGT applies.
And there is another exemption, which is that CGT does not apply as a general rule to assets acquired before 20 September 1985 (i.e. assets owned when CGT was introduced).
Illustration if the deceased purchased Commonwealth Bank shares when they first issued in September 1991, they would have paid $5.40 per share. If sold today, the sale price would be about $100 per share. The capital gain would be $94.60. A 50% discount is applied because the shares have been held for more than one year. So one-half, that is $47.30, is added to the taxable income of the estate (if sold by the legal personal representative) or of the beneficiary (if sold by the beneficiary who inherits the shares).
Super death benefits tax is payable if a deceased person’s superannuation balance passes as a lump sum to a non-dependent beneficiary. This tax applies from 1 July 2007.
Superannuation balances are left outside of a Will – they are not assets of the estate.
The superannuation balance is paid at the discretion of the trustee of the super fund, subject to a Binding Death Benefit Nomination (if one applies).
Super death benefits tax is payable by a non-dependent beneficiary on the superannuation balance they receive.
Where the trustee has the choice between paying the balance to a dependent or a non-dependent beneficiary, the super death benefits tax may be an important consideration in exercising the choice.
Most adult children will be non-dependents and therefore be liable to pay super death benefits tax if they receive a lump sum death benefit from their parent’s superannuation balance as an inheritance (they are not allowed to receive an income stream). The lump sum is added to their taxable income, and they pay super death benefits tax at these rates:
- On the taxable component of their super (taxed element), tax at the beneficiary’s marginal tax rate or 17% (15% + 2% Medicare levy), whichever is the lower; and
- On the taxable component of their super (untaxed element), tax at the beneficiary’s marginal tax rate or 32% (30% + 2% Medicare levy), whichever is the lower.
There are some circumstances where this tax may not apply, such as when the deceased and/or the beneficiary are older than 60 years.
As was the case with Death and Estate Duties, concessions apply to dependents. In this case, dependents pay no super death benefits tax on lump sums or income streams inherited. A dependent is defined as:
- the spouse or de facto spouse (of any sex), and any former spouse or de facto spouse
- a child of the deceased under 18 years old (and up to 25 years old if financially dependent) or without age limit if disabled; or
- an interdependent person, such as a person having a close personal relationship, living together, provided with financial support, or providing domestic support and personal care to the deceased
In summary, if there is no spouse or dependent child to leave the super to, if possible, the balance should be withdrawn before death so that it is distributed tax free under a Will, instead of passing to a non-dependent as a super death benefit who is facing a tax rate of up to 32%, a rate which has not been seen since the days death duties were payable!
Conclusion – Is Australia a tax haven for inheritance taxes
The ATO has a statement on its website. It is:
There are no inheritance or estate taxes in Australia
It is true therefore that Australia is a tax haven for inheritance taxes, but only if your affairs are structured to avoid Capital Gains Tax and Super Death Benefits Tax.
Anthony Cordato has practised as a lawyer in the central business district of Sydney for many years. Anthony practises in his own firm, the boutique legal firm of Cordato Partners, which he founded in 1996. Anthony specialises in the fields of law he loves: business law, property (real estate) law and tourism (travel) law. With his experienced team, Anthony looks after transactions and litigation. Anthony is proud to have acted on more than 10,000 real estate transactions. His firm is cited as a party’s solicitor in more than 65 reported decisions in the courts and tribunals of New South Wales and in the Federal Courts. Contact Anthony through his website or LinkedIn.
