It sometimes happens that the value of an estate asset is such that it cannot readily be appropriated to a beneficiary in satisfaction of their entitlement to a share of the estate (that is, the value of the asset is more than the value of the beneficiary’s percentage entitlement).
However, an LPR may agree to transfer a particular estate asset to a beneficiary if that beneficiary pays an amount to the LPR. A question arises as to the tax consequences of such a payment.
Subsection 128-15(1) of the ITAA 1997 provides that if an asset owned by a deceased person passes to a beneficiary in their estate the consequences set out in section 128-15 apply. That section disregards any capital gain or loss made by the deceased’s LPR when an asset owned by the deceased passes to a beneficiary in their estate. It also provides that cost base rules for the beneficiary. For most assets acquired by the deceased after 20 September 1985, the acquisition cost of an asset for a beneficiary is the deceased’s cost base at the date of death adjusted as relevant for amounts incurred by the LPR. The acquisition cost of a pre-CGT asset owned by the deceased is based on its market value at the date of death.
An asset passes to a beneficiary in one of the ways set out in section 128-20 of the ITAA 1997. Importantly subsection 128-20(2) provides that an asset does not pass to the beneficiary if the beneficiary becomes the owner under a power of sale.
Where a beneficiary pays an amount to ensure the transfer of an estate asset, a proportion of the asset does not pass to them under the deceased’s Will or one of the other ways set out in subsection 128-20(1). The deceased’s LPR must work out a capital gain or loss in respect of the transfer of an asset or part of it to a beneficiary in these circumstances. [The LPR should also consider whether they have any State based transfer tax liability.]
In respect of an asset (or part of it) that the beneficiary has purchased from the LPR, the beneficiary’s cost base includes the relevant purchase price rather than a share of the deceased’s cost base.
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.