Tax with Max: Splitting proceeds of a deceased estate

The CGT implications of selling property, and testamentary trusts explained.

Summary: To work out how much CGT is payable on a property sold from a deceased estate, you first must work out whether the property has always been lived in by the family member or used as a rental property. Testamentary trusts will bring tax benefits to those under 18 who are treated as adults with an $18,000 tax free threshold when they come into ownership of assets through the trust. From January 1, 2017, the asset threshold at which individuals cannot qualify for the age pension drops to $823,000 for a home owning couple and $547,000 for a single home owner.

Key take-out:The work test requires you to be in paid employment in order to contribute super contributions, so individuals should ensure they are meeting it properly and not using unpaid work as a component of their working hours.

Key beneficiaries: General investors. Category: Tax.

CGT on deceased estate?

I am after some advice on Capital Gains Tax on property in a deceased estate that is to be sold and the proceeds split between siblings. I am certain that the house was purchased after 1985 by my mother from her father. He built the house in the 50s.

I will receive one third of the monies from the sale of the house, the third will be approximately $220,000. My wage is approximately $170,000 per year and I want to know if the CGT is calculated on my wage? What amount would I expect to receive after CGT?

Answer: To estimate how much capital gains tax you will be paying it is important to first work out how the proceeds from the sale of the property will be treated for capital gains tax purposes.

The taxation of property within an estate is made more complicated due to the different ways that the gain can be taxed depending on the underlying facts of each case. If the property was purchased by your mother from her father and she lived in it up until she died, and the property is sold within two years of the date of her death, no capital gains tax would be payable.

If the property had been lived in by your mother, and then used as a rental property, the value of the property when it was first rented would be the cost base used in calculating any capital gain made.

If the property had always been rented, the cost of the property will be the value placed on it when she purchased it from her father. If the property is taxable, those receiving the proceeds of the sale will pay tax on half of the difference between your share of the net sale proceeds and its cost base.

Assuming that the property is taxable, and that one third share of the cost base is $100,000, the profit that will have been made on the sale of the property by the estate would be $120,000. After applying the 50 per cent general discount this would mean your taxable income in the year the property was sold would be increased by $60,000.

If an individual’s net taxable income was $170,000, $10,000 of the capital gain would be taxed at 39 per cent, with the $50,000 balance being taxed at the top marginal rate of 49 per cent due to the budget repair levy paid by top income tax payers until July 1, 2017.

You should seek professional advice as there are a number of strategies that could be used to reduce your income tax payable on an assessable gain. In addition if the proceeds from the sale of the property are not distributed to the beneficiaries under the will, due to the ongoing administration of the estate, tax may be payable by the estate at normal marginal income tax rates that could result in less tax being paid.

Testamentary Trusts and tax?

My wife and I purchased her uncle’s home from his estate in 2005. We have rented the property since that time as an investment property. We were under the belief that our 3 children could inherit it from us via a testamentary trust CGT free. However after reading your recent article it prompted me to investigate further on the ATO web site. It would appear that our three children will be liable for CGT when the property is sold by the testamentary trust, is this correct?

Answer: From an income tax point of view, having property pass into a testamentary trust does not alter the taxation treatment of assets, but instead can allow for an advantaged tax treatment when children under 18 receive income from the trust.

When income is distributed from a normal discretionary trust to children under 18 years of age the first $416 is tax-free, but after that tax is imposed at higher penalty rates. Where children receive income from testamentary trust they are treated as adults for income tax purposes and the first $18,000 is tax-free.

The price you paid your wife’s uncle’s estate for the rental property will become the purchase price for the testamentary trust. Any capital gain made on the sale of that property, depending on who the beneficiaries of the testamentary trust are and how distributions of income are made, could be taxed in your children’s hands at the higher marginal tax rates.

Can we qualify for the Age pension?

I am 72 and not working although our accountant deems me to be working enough hours per year to satisfy some test or other. The work I do is for my wife and for our SMSF. She is younger than me and earns over $200,000 a year and will probably not retire for another 3 years.

Our SMSF is worth over $500,000, my wife will receive a super payout of well over $500,000 when she retires, and we own our house and have no debts. I have heard that there is a major change happening to how people qualify for the age pension on January 1, 2017. As there is currently no chance of my being awarded an Age pension should I still apply for one in light of the changes that will commence in January 2017?

Answer: The change that you are referring to relates to the age pension assets test. Under the current assets test, no age pension is receivable once a couple with a home have assets of more than $1,163,000 and a single homeowner has assets of more than $783,500.

The changes coming into effect on January 1, 2017 will result in the point at where no pension is received decreasing to $823,000 for a home owning couple and $547,000 for a single home owner.

The other test that determines whether people receive the age pension, apart from the age test, is the income test. Under this test the total income for a couple is taken into account no matter whether only one member of the couple, by reason of having passed the age test, is eligible to receive the age pension.

Where the income received by a couple, including employment income and deemed income on investments and superannuation balances held by a person who is 65 or older, exceeds $75,452 a year, there is no entitlement to the age pension. It is therefore the income test that means that you, because of the $200,000 a year your wife earns, are not and will never be entitled to receive an age pension while she is still working.

The only way someone in this situation could become entitled to receive the age pension before January 1, 2017 is if your wife ceased work before then. If this occurred, on the basis of the assets worth $1 million that you will have, you will be entitled to receive the age pension for a short period before the assets test changes in January 2017. The only benefit of doing this would be receiving a medical concession card you would keep without any tests applying in the future.

I suspect that the financial loss that you would suffer as a result of your wife not working for a further three years would far outweigh any benefit that you may get from qualifying for a medical concession card.

I am worried that your accountant has advised that you are meeting the work test by working for your wife and your SMSF. As the work test relies on you being paid for your work I am worried that if you were audited by the ATO, if this it this case it could be found you are not be satisfying the work test and therefore cannot make super contributions.



Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au.

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