Property Inheritance

Death & taxes

Death is not a taxable event in and of itself in Australia, compared to other similar economies such as the US and UK. Whilst death duties were a feature of the Australian tax system for most of the 1900’s, this was slowly abolished at the close of the 1970’s.

But that does not mean that tax does not play a part in the administration of an estate. Instead the “estate” will assume the position of the deceased for tax purposes, and if part of administering the estate means that shares or property are sold, then the tax effects will be the same as if the deceased was still alive. Whilst death in Australia does not create tax, neither does it avoid them.

Below are some rough examples to give you an idea of how the rules work in practice, however they are no substitute for a proper review and discussion with your tax accountant/advisor.

Main residence property sold

Example 1: James has lived in his home for the last twenty years. His will instructs the property to be sold and the proceeds distributed to his son Mitch.

If you are an individual who owns your own home and has established the property as your main residence, then if you sell the property it will be exempt from capital gains tax. As the property was John’s main residence, then the same will apply here and no capital gains tax will be payable - as long as the property is disposed of and settled within two years of the deceased’s date of death.

There are safe harbour provisions which can allow this timeline to be extended including challenges to the will or other circumstances outside of your control, but will not include factors such as waiting for the market to improve or waiting for refurbishments to increase the value.

Main residence property transferred

Example 2: James has lived in his home for the last twenty years. His will instructs the property to be transferred to his son Mitch.

In this situation the estate is not selling the property, merely transferring it to his son. So the question of tax falls in the hands of Mitch. If Mitch doesn’t live in the property as his main residence then he has two years same as the previous example to sell the property and utilise the exemption. If instead he has no other main residence and moves into the property as soon as practicable, then it becomes Mitch’s main residence and the usual capital gains tax exemptions apply.

Home rented out and resided in nursing home

Example 3: James was ill and lived in a nursing home for the last four years of his life. His home was rented out to pay for the nursing home.

Technically James is not occupying the property as his main residence when he passes. But this is where the so-called ‘6 year rule’ comes into play - since James would have no other “main residence” from a tax perspective, then he can rely on the rule that allows him to treat the property for up to 6 years as still his main residence even though he is not occupying the property. If when James died the property was still his ‘main residence’ then the 2 year rule applies and the property may be tax free.

If James had been in the nursing home for longer than six years and the property had been rented out for the same amount of time, then there may be some capital gains tax payable.

Holiday house rented out

Example 4: James also had a holiday house in Queensland he rented out. This was willed to his daughter Sienna. Sienna intends to sell the property as soon as she can.

The question then becomes for tax purposes, at what time did Sienna acquire the property and for what value. If James acquired the property before 28 September 1985 then it is referred to as a “pre-CGT” asset and will have been deemed to have been acquired at the date of James’ death for the current market value – assuming the property is sold as soon as possible this may mean no capital gain is made.

If it was purchased post this date however, then Sienna is deemed to have acquired it at the same cost and date as James did. Sienna will have to find the records of how much James acquired the property for, and when, and the value of any capital improvements. If say the property had been purchased fifteen years ago then the records could be hard to find, but also the market could have jumped substantially leaving Sienna with a very high profit she will need to pay tax on.

Tax Tip: If you compare this result to the previous example, it can be argued Sienna is receiving an unfair tax burden compared to Mitch. Consideration should be made whether the most fair outcome is to liquidate all assets whilst in the name of the estate and distribute the funds equally.

Foreign resident for tax purposes

Example 5: Tom lived in his main residence from 2004 til October 2020 when he moved overseas to live permanently. He rented out the residence until his death. His will instructs the property to be sold and the proceeds distributed to his sons.

Recent changes to tax law mean that if you are considered to be a foreign resident for tax purposes your ability to rely on the main residence exemption is severely restricted. There are some circumstances where the estate may be able to rely on the main residence exemption, if say they were a foreign resident for less than 6 years and during that period there was a significant life event such as a death in the immediate family. But if this fails, then the estate could be paying tax on the full capital uplift from when they purchased the property in 2004 til when they sell it now - even though, if they were still an Australian resident, it could be tax free!

Tax Tip: A change of residency for tax purposes can have substantial effects on tax and tax planning. If you or your family are looking at moving overseas for a considerable length of time please advise us in advance so we can discuss the implications and options available to you.

There are many variables to consider with property inheritance and every situation is different, so please make sure you talk with us to gain clear insights and guidance. Our team at BLG Business Advisers are Wollongong Accountants who service right around Australia. There is no cost or commitment involved in an initial chat with us, which leaves you free to decide if we are the right fit for you.

Whatever you decide we wish you and your business every success!