Is the ATO effectively a beneficiary of your estate

The importance of having a comprehensive Will is well recognised, and few Australian adults would not have some form of legal record outlining their wishes.

However, your Will is only half the picture.  Without planning for how your assets are dealt with, you may be surprised to find that the Australian Tax Office (ATO) or State Revenue Office (SRO) becomes an unintended beneficiary of your hard earned wealth.

While there are no direct death taxes, indirect taxes such as Capital Gains Tax and Superannuation taxes can diminish the value of the assets you’ve left to your beneficiaries.

Effective estate planning takes into account a wide range of tax issues to protect your assets, minimise tax, and ensure your money gets to the right people, at the right time.

While estate planning is a complex area, we’ve outlined just two of the key tax issues you should consider.

Capital Gains Tax

Capital Gains Tax (CGT) is payable on the disposable of most assets acquired after 20 September 1985 (some exemptions do apply).

A capital gain is the increase between the amount paid when an asset was acquired, and the amount that is received when the asset is sold.  Generally CGT is triggered when the asset is transferred.

CGT does not apply to the transfer of assets from a deceased estate to a beneficiary. However, it will be triggered on any subsequent disposal.

For estate planning purposes, the date at which the asset was originally purchased is critical.

  • Pre 20 September 1985 
    For assets purchased before 20 September 1985, the taxable capital gain is the difference between the value of the inherited asset at death and its subsequent disposal.
  • Post 20 September 1985
    For assets purchased after 20 September 1985, the taxable capital gain is the difference between the value of the asset when purchased by the deceased benefactor and its subsequent disposal.

Consider the following example:

Melissa Mullins has bequeathed 2 properties to her sons Ian and John.

  • John – John receives Melissa’s beach holiday home.

The property was purchased in January 1984 for $100,000.  On the date of Melissa’s death the property was worth $550,000. Six months later John sells the property for $600,000.

The taxable capital gain is the difference between the value of the property at disposal and the value of the property at the date of Melissa’s death.

John has a capital gain of $50,000.

  • Ian – Ian receives Melissa’s city investment property.

The apartment was purchased in May 1988 for $75,000.  On the date of Melissa’s death the property was worth $400,000.  Six months later Ian sells the property for $500,000.
The taxable capital gain is the difference between the value of the property at disposal and the value of the property when originally purchased by Melissa.
Ian has a capital gain of $425,000

In this example, the property received by John is of a higher value ($150,000 at the time of Melissa’s death) than that of Ian yet his tax liability is significantly lower.

Superannuation taxes

In most situations, after an individual dies, their superannuation fund will pay out the remainder of their superannuation to a nominated beneficiary (usually a spouse or child). The payout known as super lump sum death benefit is tax-free if the beneficiary is dependent on the fund member. Generally speaking a spouse (including same sex spouse) and children under 18 are considered to be dependents for tax purposes.

To receive this payment tax-free children over 18 years old (or any other beneficiary that is not a spouse) must prove that:

  • He or she was financially dependent on the deceased superannuation fund member;
  • He or she had an ‘interdependent relationship with the deceased superannuation fund member.  An interdependent relationship being where two people live together, and where one (or both) provide for financial and domestic support and care for the other.

Where the above criteria cannot be met, the beneficiary of the death benefit must pay tax at the rates shown below.

Where the fund member does not have a valid binding death benefit nomination, the Trustee will pay the superannuation to one or more of their dependents in proportions determined by the Trustee.

For beneficiaries in a high tax bracket, extra payments can upset their careful tax planning and lead to the payment of additional taxes.

Indirect taxes are an important tax planning issue. Although the examples above may appear fairly straightforward, there are many intricacies to the tax and estate planning process. Without considered tax planning, your estate and beneficiaries may pay unnecessary taxes.