16. Gifts to foreign residents – usual rollover does not apply

Where an asset that is not taxable Australian property owned by a resident deceased person passes to a foreign resident beneficiary, the usual CGT roll-over for death does not apply. Instead, CGT event K3 (in section 104-215 of the ITAA 1997) happens.

Current at 1 January 2022

16. Gifts to foreign residents – usual rollover does not apply

Where an asset that is not taxable Australian property owned by a resident deceased person passes to a foreign resident beneficiary, the usual CGT roll-over for death does not apply. Instead, CGT event K3 (in section 104-215 of the ITAA 1997) happens.

Current at 1 November 2021

Non-taxable Australian property is broadly any asset that is not real property in Australia (including mining and similar rights) or an indirect interest in Australian real property. Non-taxable Australian property includes land outside Australia interests and in most Australian and foreign public companies.

CGT event K3 is taken to happen immediately prior to the death of the deceased with the result that any capital gain or loss is included in the deceased’s date of death income tax return. A capital gain from CGT event K3 will arise if the market value of the relevant asset when the deceased died is more than its cost base at that time. A capital loss is made if that market value is less than the asset’s reduced cost base.

CGT event K3 does not occur when an asset that is taxable Australian property passes to a foreign resident beneficiary as gains and losses from these assets will be brought to account for Australian tax purposes when a later CGT event happens (for example, the beneficiary sells the asset). [Gains and losses made by a non-resident from non-taxable Australian on the other hand are disregarded. Without CGT event K3, the gain or loss that had accrued for the resident deceased would fall outside of the Australian tax system.]

However, the current law does not always achieve the intended policy. As it currently stands, if CGT event K3 happens after the amendment period for the deceased’s final assessment has expired, then any gain from the event is tax-free because an amendment of the assessment is statute barred under subsection 170 (1) of ITAA 2936. [The general anti avoidance provisions in Part IVA of the ITAA 1936 may need to be considered if this eventuality is planned for.]

The amendment periods permitted under the ITAA 1936 are generally either 2 or 4 years from the making of an assessment by the ATO depending on whether the deceased was involved in a small business.

This timing problem with the CGT event K3 is known to regulators and was proposed to be addressed by amendment to the law: see “Minor Amendments to the Capital Gains Tax Law – Proposal Paper 2012” issued by the Treasury. The proposed amendment was designed to capture any gain or loss from this CGT event in either the estate or testamentary trust tax return at the date of transfer, albeit at market value at the date of death of the testator. The subsequent Federal Government announced on 15 December 2013 as part of its “Announced but unenacted measures review” that it was not proceeding with the measure.

 

 

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.