To sell, or not to sell? That is the question (in deceased estates)

Rare are the circumstances where “The Tax Man” offers any dispensation from our tax-paying duties. Death is one of those circumstances.

Deceased estates enjoy roll over relief from the payment of capital gains tax.[1]  One power of an executor (or administrator, where there is no will) is to decide how assets within an estate are dealt with. Subject to any specific direction in a will, an executor will ordinarily have the power to sell assets. They will also have the power to appropriate certain assets in-specie, and apply them towards a beneficiary’s share of the estate.

For example, an estate may have two equal residuary beneficiaries with the assets comprising $200,000.00 cash and shares Medibank Private Limited also valued at $200,000.00. In discharging their duties, the executor could give beneficiary 1 $200,000.00 and could transfer the shares to beneficiary 2.  While these types of decisions are often made in consultation with the beneficiaries, the executor generally does not require the consent of the beneficiaries to make these decisions.

Where there are multiple beneficiaries of an estate, from a practical point of view, often the easiest thing for an executor to do is say “show me the money”. That is, an executor elects to sell an asset within the estate. It is then easy to divide the sale proceeds among the various beneficiaries with little argument. Executors are often pressured by beneficiaries who have large debts and would prefer to receive “liquid” funds. However, from a tax perspective, often it is not prudent for an executor to engage their powers of sale.

The sale of assets within an estate will often attract the payment of capital gains tax liabilities. However, where assets are transferred to beneficiaries of an estate, there are no immediate tax consequences.[2] On transfer, The Tax Man allows you to “roll over” or defer the tax consequences until some later time or event.

The general rule of thumb is that if the deceased person would have been entitled to reduce or disregard a capital gain while they were alive, that right continues in the estate. The right continues for a two year period beyond the date of the deceased’s death.[3]

For example, let’s say that at the date of Lucy’s death, she:

  • owned 500 Commonwealth Bank shares in her sole name, valued at $36,650.00. Lucy purchased the shares in 2005 for $20,000.00 (at $40.00 per share);
  • owned 500 National Australia Bank shares in her sole name, valued at $12,240.00. Lucy purchased the shares in 1984 for $7,500.00 (at $15.00 per share); and
  • was the sole Registered Proprietor of her home, where she lived until she died.

Lucy left a will appointing Matthew her as her sole executor and nominating James as her sole beneficiary.

On Lucy’s death, if Matthew transferred the Commonwealth Bank shares to James, there would be a capital gains tax rollover. No tax is payable on the transfer. James would enjoy the assets with the benefit of regular dividend payments. For calculating any future capital gains tax, James would acquire Lucy’s cost base when she initially purchased the shares ($40.00 per share).

If James later sold the shares for $40,000.00 ($80.00 per share), he would have to pay capital gains tax on $60,000.00 (the difference between the ultimate sale price and Lucy’s purchase price). James may be entitled to a reduction in the tax depending on how long he retained the shares.[4]

If Matthew, as the executor, elected to sell the Commonwealth Bank shares within the estate, there would be a capital gains tax event and the estate would be liable to pay tax on the gain. This would reduce the overall “value” of the inheritance being received by James.

The National Australia Bank shares were acquired by Lucy in 1984, before capital gains tax was introduced. If Matthew sells these shares, there will be no tax payable. If Matthew transfers these shares to James, there will also be no capital gains tax payable. James would acquire the shares at their value on Lucy’s death.

In relation to the main residence of the deceased person, there is an exemption from paying capital gains tax.[5]  While it is a complicated area of law, if an executor sells the deceased’s main residence, provided settlement is effect within two years of deceased’s death, the sale proceeds will be exempt from capital gains tax.

Any income earned beyond the date of the deceased’s death (by way of dividend payments, share sales etc.) must be declared in a separate tax return filed on behalf of the estate. This is another obligation of an executor. The estate requires its own tax file number because it is a separate tax paying entity. The estate is treated like an individual for tax purposes and can take advantage of the tax free threshold for three years. Because of this, if assets within an estate are to be sold, there is merit in spanning the sales out over several financial years.

While selling assets within an estate may seem like an easy and efficient way to approach the estate administration, executors should seek legal and accounting advice before relying on the powers of sale bestowed upon them.

 

[1] Income Tax Assessment Act 1997 (Cth) Division 128.

[2] Provided those transfers are consistent with the terms of the will or the applicable intestacy laws.

[3] Income Tax Assessment Act 1997 (Cth) Section 152.80.

[4] Income Tax Assessment Act 1997 (Cth) Division 115.

[5] Income Tax Assessment Act 1997 (Cth) Division 118.