In Australia, we don’t have death duties or inheritance taxes, so when assets pass to beneficiaries through a person’s estate, capital gains are generally disregarded. However, there is an important exception to that general rule – often forgotten when people plan for their estate. CGT Event K3 occurs when a deceased taxpayer passes on assets to:
For foreign resident beneficiaries, CGT Event K3 happens where the deceased taxpayer was an Australian resident prior to their death, and the asset being passed to the foreign resident is not ‘Taxable Australian Property’. This means that common assets like shares in public or private companies, units in a managed fund, interests in businesses, etc, are exposed to CGT Event K3.
CGT event K3 occurs just before the deceased person’s death. As a result, any capital gain or loss covered by this CGT Event must be included in the final tax return for the taxpayer. The legal personal representative handling the taxpayer’s estate needs to consider this potential liability in administering that estate.
As asset “passes to a beneficiary” as set out in ITAA97. The beneficiary will become the owner of the assets:
Further, an asset passes to a beneficiary when the beneficiary becomes absolutely entitled to the asset as against the estate’s trustee, whether or not the asset is later legally transmitted or transferred to that beneficiary.
Taxable Australian property includes:
It is sometimes difficult to determine if some shares and trusts have an indirect interest in Australian real property. This is an important distinction, as CGT event K3 only occurs where assets pass to a foreign resident beneficiary and the assets are not Taxable Australian Property. We can help in understanding these tax consequences of your investment structure in effective estate planning.
At the time of estate planning, your beneficiaries may be residing in Australia, however it is still very common for Australians to live and work overseas. Revisiting your estate planning when a beneficiary moves overseas is key can be vital, so the estate doesn’t have to pay CGT on the transfer of an asset to a foreign resident beneficiary. We can help to consider the terms of a will or testamentary trust to understand which beneficiaries might be taxable for certain assets, taking this CGT Event into account.
Our lawyers here at Waterhouse Lawyers are experienced in providing advice on the tax issues affecting estate planning, so we are here to help manage these risks. Please contact us on 02 9252 8746, firstname.lastname@example.org or through our contact page.