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Death and Taxes – The Only Certainty in Life!

Benjamin Franklin.

This famous statement of Benjamin Franklin in 1789 is very much as relevant today as it was in the 18th century. Although there are no longer “death taxes” in Australia, that is not to say that assets in an estate are not taxed or will attract certain percentages of taxation in certain circumstances. Estate administration lawyer Debbie Sage discusses some of these issues.

Many people believe that after they die, their property will pass to whomever they have left it to in their Will and that there will not be any significant taxation issues involved. We no longer have death taxes in Australia, do we? Nothing could be further from the truth!

Whilst it is true that real property owned by a person who dies which was occupied as their principal place of residence will not attract any capital gains tax, there are certain preconditions and time limits which apply to the exemption of this tax. Sometimes these issues can get fairly murky when an elderly person is placed into a nursing home or into care which leaves their former principal place of residence vacant or alternatively, rented out to tenants. If there is a significant delay between the date a person dies and the finalisation of the estate, you could also run into problems with the Australian Tax Office (ATO) in relation to claiming an exemption from capital gains tax and other concessions which are available to a deceased estate and the beneficiaries.

While many people who pass away have relatively uncomplicated assets and family situations, in these modern times it is more likely that estates will include investment properties, trusts, companies, self-managed superannuation funds, superannuation policies with a lump sum death cover component and any number of different entities that own assets that are linked to or in the name of the deceased. The question as to whether these entities or the ultimate beneficiaries in the estate will be subject to paying tax is completely dependent upon how these assets are owned and whether any tax is payable in relation to the transactions involved in transferring these assets into the estate and to the beneficiaries.

A good example is a company owned or controlled by the deceased. Quite often a company will have a sole director with the shares owned by the deceased. Although the company owns assets by way of property, cash, shares and other plant and equipment, it is the ownership of these shares which is relevant to the administration of the estate. The company is a separate legal entity that continues to survive despite the death of the director and shareholder. It is then an issue of transferring the assets of the company via the shareholding to the estate. This can involve very complex taxation issues which relate to firstly transferring the shares into the estate and then converting the assets of the company and transferring these to the beneficiaries. Without going into serious detail, if these assets are not correctly transferred and/or disposed of in a certain order, it could be that the estate and therefore the beneficiaries are subject to a significant taxation liability.

Another good example is a lump sum death benefit pursuant to a superannuation insurance policy or straight out life assurance cover. Unless the principal beneficiary under the policy is a financial dependent of the deceased, taxation of any lump sum benefit can range between 16% and 32% tax! The deceased and his or her advisors need to be careful when they draft binding death nominations for these policies so that the tax positions of the beneficiaries are taken into account before these documents are drafted. The same issue applies to self-managed superannuation funds and payment of lump sum death benefits within the fund to surviving nominated beneficiaries. The issue as to whether the beneficiary is “financially dependent” or “financially interdependent” can be a very complicated issue with significant taxation consequences arising from the definition.

Whenever real property is involved as assets of an estate, no matter what entity owns this, it can always be a complicated situation regarding potential liability for capital gains tax. Although property obtained prior to the introduction of capital gains tax can be exempt, there are many investment properties and other land that is owned by a deceased person that would be subject to the imposition of capital gains tax. This can be a significant amount of liability for the estate, especially if there has been a huge increase in the value of the property from when it was first purchased. If the proper taxation liability position is not carefully investigated by the executors, there could potentially be a huge tax bill which is missed before the assets are distributed to the beneficiaries. Unfortunately for the executors, they could face a personal liability for this tax bill if it is not properly investigated!

Another very common tax liability which is overlooked relates to share portfolios. Once again, unless the shares were purchased prior to the introduction of capital gains tax, any shares that are owned by the deceased or his or her related entities could be subject to the imposition of capital gains tax. Once again, if the value of the shares has risen dramatically since they were originally purchased, the executors of the estate could well find themselves personally liable for a tax bill in relation to capital gains tax for the shares. In many cases, it can sometimes be difficult to trace the details of the original purchase of the shares so it is sometimes unclear as to what the position is in relation to whether tax is payable. It can also be extremely difficult to assess tax liability where the shares are kept by the beneficiaries and transferred “in specie”. Once again, executors need to be extremely careful and obtain sound taxation advice in relation to these issues before the assets of the estate are distributed to the beneficiaries.

These are just some examples of issues that often arise in estates that we assist executors with during the administration of an estate. What many people do not realise is that it is possible for many of these issues to be investigated and dealt with during your lifetime through obtaining proper estate planning advice. We are often involved in administering estates where the deceased has quite complicated business structures with difficult family situations and yet they decide to only have a “simple Will” or, worse, a “do it yourself Will”! Unfortunately, when these simple Wills or do it yourself Wills are used in these types of estates, in many cases it can cost the estate (and therefore the beneficiaries) hundreds of thousands of dollars in legal and accounting costs to correct the issues that arise in relation to distributing the assets of the estate. By making a small investment to obtain the correct advice now you can potentially save your estate hundreds of thousands of dollars in legal and accounting fees that may be required to fix issues at a later stage.

We constantly come across situations where clients have the means and opportunity to obtain proper legal and accounting advice with respect to their estate planning but elect to cut corners or save money by doing cheap simple Wills or do it yourself Will kits. There are many instances of very experienced, intelligent people who opt to do this despite the fact that they have quite complex family situations and various entities and assets. We can only reiterate our advice to our clients to ensure that they obtain appropriate specialist advice with respect to their estate planning. This can make so much difference to your family members who are left behind to clean up the mess!

For further information please contact our Wills and Estates and Family Law Department Manager, Donna Tolley on direct line 07 5506 8241, email dtolley@attwoodmarshall.com.au or free call 1800 621 071 to book a free 30 minute appointment with one of our dedicated Estate Planning lawyers.

We have a dedicated Wills and Estates team that practices exclusively in this complicated area. Please click here to access our team.

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Debbie Sage

Debbie Sage

  • Lawyer
  • Wills and Estates
  • Direct line: 02 6670 1006
  • Mobile: 0421 666 663