Negotiating death and taxes

An inheritance can often mean having to handle life's two grim inevitables, writes Bina Brown.

An inheritance can often mean having to handle life's two grim inevitables, writes Bina Brown.

BEING the beneficiary of an inheritance can be both a blessing and a curse, depending on how you handle it.

After all, it is not every day people get handed large amounts of money or valuable property they can use as they wish.

Dealing with an inheritance is a growing problem but still a good one to have.

"We are at the beginning of a wave where retirees who own their own property and with share portfolios bought before 1985 are starting to move on," director of BFG Financial Services, Suzanne Haddan, says.

"It opens up the need for a lot of financial decision making for the beneficiaries."

Decisions like whether to sell the inherited assets, use the money to pay down the mortgage, invest the money, fund the children's or grandchildren's education, top up your own superannuation or blow it all on a long holiday.

What you do with any assets, and when you do it, can make a difference to the amount of tax you pay as well as your own life going forward.

"The source of the money doesn't change the decision-making process that you need to go through," Haddan says. That means focusing on your goals and the time you have to achieve them.

The taxman comes for us all

While Australia doesn't have death duties, capital gains tax is often seen as being very close to it. If you inherit either shares or an investment property, CGT will almost certainly be an issue at some point.

The family home is one of the most common inheritances. As long as the property was the main residence of the recently departed, all tax can be avoided if it's sold within two years, a partner and tax expert at Matthews Steer Chartered Accountants, Anthony Flapper, says.

How other inherited assets are taxed will partly revolve around when the asset was purchased - there are different rules pre- and post-CGT, which was introduced in 1985.

If your parents bought a property in 1960 for $5000, pre-CGT, and it passes to you and is now valued at $500,000, the market value at the date of death becomes the value on which any CGT is calculated. The $500,000 becomes the new cost base.

Here, no tax will be payable but any increase in value above $500,000 will be subject to CGT (provided the beneficiary does not move into the property as a main residence).

If the property was purchased post-CGT then the rules are different.

A house bought in 1990 for $150,000, which is then passed on to you, would have a cost base of the initial purchase price.

So if the property is now worth $500,000 and your cost base is $150,000, you have a gross capital gain of $350,000.

If you are the non-financially dependent (that is, not a spouse or someone under 18) beneficiary of a payment from the deceased's superannuation fund then you may be up for a substantial tax hit.

With death benefits on super, the tax that may be payable depends on whether the super fund member received a tax concession on their original contributions.

The head of wealth management at HLB Mann Judd Sydney, Michael Hutton, says a superannuation payout to a financial dependant, such as a spouse or child under age 18, is tax-free.

But if superannuation is paid to non-financial dependants, the proportion of the pay out that is deemed to be from the contributions where a tax concession was received will be taxed at 16.5 per cent. No arguments, please!

Unfortunately, there is little that can be done about the problems that arise when a family or holiday home is left to multiple beneficiaries who then can't agree on how to use or dispose of the property, the principal of O'Dwyer & Bradley Solicitors, Tim O'Dwyer, says.

"Some of my clients ask 'no arguments, please!' to be added to their wills," he says.

The other prime area for disagreement is when someone is living in the house that then passes to beneficiaries.

"Any provision in the will allowing someone to live in your home before it passes to other beneficiaries should be drafted very carefully," O'Dwyer warns.

Joint executors give it a fair go

CHRIS WARREN counts his blessings that he got on with his two brothers well enough to divide an inheritance amicably.

"We were joint executors of my father's estate and he left his house to the three of us," he says. "There was never any issue about what might happen."

Chris and a brother bought out the other brother and rented out the house for a couple of years before selling it.

"I thought it was a good investment at the time," Chris, a real estate agent with Remax Colonial in Brisbane, says. "It was also about hanging on to something. One brother just wanted the cash and to move on, so we had the property valued and went from there."

After a few years he and his brother decided they could probably do better elsewhere and sold the house.

Because it was used as a rental property and was kept for more than two years after his father's death, the property sale became subject to capital gains tax.

A property that was the principal place of residence of the deceased is capital gains tax-free in the hands of the beneficiary, provided it is sold within two years.

"We had the place revalued and there was no real gain in it so we just split the amount payable and then the proceeds. It was all very amicable," Chris says.

"Being in real estate, I come across a lot of deceased estates and can't believe the acrimony in some cases between family members and how greedy some people can get. I see now that our situation was the exception."

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