5 common estate tax traps and tips

This month we identify some of the most common tax issues identified when administering an estate. Some of these issues can be easily avoided with a little bit of advanced planning and picked up early during the estate administration.

Current at 1 November 2021

5 common estate tax traps and tips

This month we identify some of the most common tax issues identified when administering an estate. Some of these issues can be easily avoided with a little bit of advanced planning and picked up early during the estate administration.

Current at 1 November 2021

1. Appointing an overseas resident to be the sole executor of the estate of an Australian-resident individual

TrapTip
An estate is treated as a trust for tax purposes and the tax residency status of any trust is determined by whether a trustee is an Australian resident for tax purposes or where the trust is controlled and managed.

Obtaining a grant of probate solely in the name of a foreign resident executor, would mean that the trust is regarded as a foreign trust. This may have adverse tax consequences, particularly for resident beneficiaries.

For example, while a foreign executor would not be assessable on capital gains from non-taxable Australian property (such as most publicly listed shares) made during the estate administration, amounts attributable to the gains will be fully assessable to resident beneficiaries on distribution. The beneficiaries will not be able to apply the CGT discount or capital losses.

Careful consideration of the facts of each case should be taken into account and weighed before a grant of representation is obtained solely in the name of a foreign resident. Relevant factors to consider include the residence of the beneficiaries, the types of assets included in the estate and the likely amount of gains and losses.

If, on balance, the tax consequences would be more favourable if the estate were a resident trust estate, an Australian resident could be appointed as co-executor.

 

2. Appointing an Australian resident as executor of the estate of a deceased foreign resident

TrapTip
Income and gains that were outside the Australian tax net may be brought within it, if a foreign testator appoints an Australian resident to be one of their executors. This is because the estate will be treated as an Australian tax resident.Again it is important to weigh-up all of the facts and circumstances to determine whether it is more favorable from a tax perspective to appoint a resident executor.

 

3. Overlooking CGT implications where main residence is on more than two hectares of land

TrapTip
Currently, when a main residence is sold within two years of death, it is exempt from tax. However, this exemption only covers the dwelling and up to two hectares of adjacent land used for private purposes in association with the dwelling. The gain on the excess land (or land that is not used for private purposes) will be taxable.Obtain a valuation of the property which assigns a separate value to the dwelling /exempt land and the excess land. Unless the dwelling is in poor condition, a substantial proportion of the value of the property may relate to the dwelling thus reducing the assessable capital gain on the land.

 

4. Assume the main residence exemption also applies 2 years after death of a spouse or life tenant with the right to reside

TrapTip
The main residence exemption continues to apply for a period up to two years after the death of the former owner of a dwelling. The exemption also continues if the residence is occupied by the deceased’s spouse or a person who has a right to occupy the dwelling under the deceased’s Will. Importantly however, there is no rule that continues the exemption for two years after the death of the spouse or with a right to the dwelling (where that happens more than two years after the death of the owner).You may want to apply for a private ruling asking the Commissioner to exercise the discretion to extend the two year period in which the sale takes place.

 

5. Assume all jewellery, furniture and knick knacks sold will be tax free

TrapTip
Any gains from personal use assets and collectables are taxable if the acquisition cost of these items acquired post September 1985 is greater than $10,000 or $500 respectively. Importantly, if the assets were acquired prior to September 1985, they will be taken to be acquired for market value at the date of death of the deceased. It is therefore important to consider the CGT implications when selling Uncle John’s boat or Aunt Martha’s cameo brooch.

Losses from personal use assets (other than collectables) are disregarded and losses from collectables can only be applied against gains from collectables.

Get a valuation of the items especially when the deceased may have acquired the collectables prior to 1985.

…and don’t claim losses that are not able to be claimed.

 

 

 

Feel free to contact our team should you want to discuss this topic further and potentially have clients who may be in this situation.

 

 

This publication is not intended to be and should not be used as a substitute for taking taxation advice in any specific situation. The information in this publication may be subject to change as taxation, superannuation and related laws and practices alter frequently and without warning.  Neither BNR Partners Pty Ltd, our employees or agents are responsible for any errors or omissions or any actions taken or not taken on the basis of this publication.