People complain about taxes but if you had to choose which tax to pay your preference would have to be capital gains tax.
It is not triggered until you dispose of the asset, which may be many years from when you bought it, and provided you have owned it for over a year, you get a 50 per cent discount.
This means even the highest earning taxpayer cannot pay more than 23.5 per cent of a capital gain unless they sell it soon after they bought it.
Furthermore, even death does not trigger capital gains tax – it merely transfers any CGT liability to the beneficiaries. If the asset is disposed of they may be liable for capital gains tax but if the asset is kept for their lifetime, any CGT applicable would be passed on to their beneficiaries.
If the assets are kept indefinitely it could be deferred for generations.
To help you understand how it works, let’s imagine you have been left an investment property by your mother who has recently died.
If she bought it before 20 September 1985 it would be CGT free and you will be deemed to have acquired it on the date of her death at its market value then.
Suppose she paid $90,000 for it in August 1985 and its value was $800,000 when she died on 1 November 2018. For tax purposes you are deemed to have bought it for $800,000 on 1 November 2018 – you receive the property with no CGT liability because the original owner had none.
If she acquired the property after 20 September 1985 it is subject to CGT and any capital gain is effectively transferred to you.
For example, if she bought it for $90,000 on 1 October 1985 the Tax Office will assume that you acquired it for just $90,000 on the date she acquired it.
The same principles apply to the family home. Usually it will be exempt from CGT and in most cases will be deemed to pass to the beneficiaries at its market value at date of death.
It can continue to be exempt from CGT if:
- You sell it within two years (you can apply to the Australian Taxation Office for an extension)
- Someone granted the right to live there under the will occupies the property
- You move into it yourself and cover it with your main residence exemption
It all turns on the question of the property being the deceased’s main residence at time of death. They can be absent for up to six years while renting it out and it would still be considered their main residence.
If it is not earning income the period of absence can be infinite.
As you can see, it’s simple but the examples do highlight the importance of seeking advice before you sell any assets you have received through a will as you may find yourself facing an unexpected capital gains tax bill.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. firstname.lastname@example.org