Earlier this month I was contacted by Elizabeth Moran on behalf of the Australian Investors Association to answer a complex question on Capital Gains Tax when inheriting shares through a Will.
The questions from long standing member Malcolm are below:
I am, and have been a member of the AIA for many years (well over 10!).
I have an easy question for someone at the AIA to inform me about.
When a spouse inherits shares in the Will of a deceased spouse, when does a CGT event occur, and what cost base should be used. I am receiving conflicting advice from others at present.
My understanding is that, when a spouse inherits shares in the Will of a deceased spouse, then –
A CGT event is not triggered
The surviving spouse also inherits the deceased spouse’s cost base of the shares
A CGT event is triggered whenever the surviving spouse sells some or all of the inherited shares
The capital gain will be the difference between the sale’s net proceeds and the deceased spouse’s cost base inherited by the surviving spouse
Is this correct ?
I have been advised that inheriting shares in a Will can trigger a CGT event, in which case –
The deceased’s Estate will bear the expense of the CGT
The surviving spouse will inherit the shares at the date of death and at a valuation at the date of death, which will become the surviving spouse’s initial cost base for those shares
Is this also correct ?
Any clarification you are able to provide will be much appreciated.
Thank you.
Malcolm
They are great questions.
Tax matters, including CGT liability, & estate planning can be quite complex and if you don’t get it right the Executor of the estate can be held personally responsible for the estate tax liabilities to the ATO! OUCH!
Whilst I am an estate planning expert & a SMSF specialist advisor; I always ensure I cross the T’s and dot the I’s by speaking on anything other than simple straight forward tax issues with my good friend Steve Grant who holds a Master’s Degree in Laws and is a Tax Expert from the law practice Merthyr Law.
Thank you Steve for chatting with me today. Let’s get straight down to business: Is death a CGT event? It is my pleasure to speak with you Shane. You are quite correct that the readers should be careful in all matters dealing with tax because getting it wrong can be very costly.
In relation to estate planning there is a special rule that allows any capital gain or capital loss made on a post-CGT asset to be disregarded if, when a person dies, an asset passes:
To their “beneficiary” or their “legal personal representative” (LPR), or
From their “LPR” to a “beneficiary”.
Therefore the cost base of the shares for a surviving spouse upon the death of their spouse is the cost base that the deceased spouse had when they died.
“If the deceased acquired the asset on or after 20 September 1985, the first element of your cost base and reduced cost base is taken to be the deceased’s cost base and reduced cost base for the asset on the day they died.”
So no tax payable on shares left to the spouse under the will, but if the spouse sells the shares this will give rise to a CGT event.
Check out the page on record keeping for CGT. The page provides some ideas about reconstructing records if you can’t get the information from the company or the deceased’s old tax returns.
The idea is to narrow the period during which the deceased is most likely to have acquired the shares – and then choosing a reasonable purchase price from within that period. You then keep records about your decision and the reasons behind it. The ATO may challenge you if you select a high purchase price. Of course, the deceased might have multiple acquisition dates from dividend reinvestment. Source of italics per ATO website And what about pre-CGT Shares, Steve? A CGT asset acquired prior to 20 September 1985 is referred to as a “pre-CGT asset”. The disposal of a pre-CGT share is in most cases exempt from capital gains tax.
Where a pre-CGT share passes to a beneficiary, upon the death of a person, there is a deemed acquisition at market value on the date of death of the deceased.
Are there any special cases, the reader’s should be aware of, Steve?
CGT Event K3 occurs when a post-CGT share owned at the time of death passes from the deceased to a tax-advantage entity (i.e. an exempt charity or a trustee of a complying superannuation entity) or to a foreign resident. The capital gain or capital loss from a CGT Event is not disregarded, so the estate (the executor) will have a tax bill from the shares left to a spouse living overseas.
CGT Event K6 is to tax the disposal of pre-CGT shares where the company has property acquired after 20 September 1985 (post CGT property) with a market value that represents at least 75% of the net value of the company. Where CGT Event K6 applies, a capital gain is realised equal to the excess of the portion of the consideration for the disposal of the shares or units that reasonably represents the post CGT property over the cost bases of that property. Thank you for your time Steve.
As you can see Liz the CGT rules in respect of inherited shares can be complex. Malcolm will be able to easily answer his own questions from the information provided.
Thanks for the opportunity in assisting your members & readers.
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I have been a long time supporter and speaker for the Australian Investors Association. I highly recommend subscribing to their online magazine 'Investors Voice' for up to date, fast and reliable market information. You can check out what they have to offer at this link: https://www.investors.asn.au/magazine/ As stated above Steve Grant is a long time colleague of mine and one of the best in his field of expertise. I can not recommend a better tax professional than Steve, his website can be found at this link: https://www.merthyrlaw.com.au/taxation-law/