How Does Capital Gains Tax On A Deceased Estate Work In Australia?

When dealing with the passing of a loved one, the last thing anyone wants is to get caught up in complicated financial matters. Yet, it’s essential to understand how Capital Gains Tax (CGT) applies to inherited properties in Australia. This article will guide you through this process in the most straightforward way possible, to try and alleviate any unnecessary stress.


In this blog, we’ll explore exemptions, eligibility for tax cuts and tax laws. By the end, you’ll feel confident, knowing you have a better grasp of CGT.


What Is A Deceased Estate

A deceased estate refers to all the belongings, properties, debts, and money a person leaves behind after they pass away. It’s like the whole package of what they had in their life. When someone dies, their estate needs to be handled, which means taking care of any debts, selling or transferring their assets, and giving what’s left to the people who should receive it. In simple terms, it’s about dealing with everything that’s left behind after someone passes.


Who Pays Capital Gains Tax On A Deceased Estate?

When handling a deceased estate, it’s the beneficiaries who must pay the capital gains tax liability. If they inherit assets like property or investments and decide to sell them later, any profit they make (capital gain) might be taxed with CGT. It’s important for beneficiaries to understand these implications and fulfill their tax responsibilities related to the deceased estate.


Making Sense Of Inherited Property Capital Gains Tax

When you inherit property, you might be unsure about if you pay capital gains tax. The good news is that in most cases, you won’t pay CGT. CGT becomes relevant when you decide to sell or dispose of an inherited asset, such as a house or shares.


Now, here’s the catch: If the property you inherited was used as a main residence, you may be exempt from CGT when you eventually sell it. This main residence exemption acts as a shield against capital gains tax.


On the other hand, if you’ve inherited an investment property, you will have to pay capital gains tax. If you have then held the inherited asset for more than 12 months before selling it, you might qualify for a CGT discount. This discount can reduce the amount of capital gain subject to tax, making it a favourable option for many.


However, if the deceased acquired the asset before 20 September 1985, there’s an alternative called indexation. By adjusting the asset’s cost for inflation up until September 21, 1999, you can determine a different capital gain amount for tax purposes.


Keeping records of important details is crucial in the CGT journey. Note down acquisition dates, values, and related costs as these records will come in handy when calculating the capital gain at the time of sale.


It’s worth noting that if you’re a foreign resident inheriting property or dealing with tax-advantaged entities, special rules apply. Be sure to seek advice or guidance from an experienced tax professional or the Australian Taxation Office.


Deceased Estate Capital Gains Tax: The 2 Year Rule

Deceased estate capital gains tax has its unique rules, including the “2-year rule” main residence exemption. If you sell the inherited main residence within two years of the deceased passing, it becomes exempt from capital gains tax, based on the market value at the date of death.


However, you must always keep in mind that this only applies to the main residence. If the inherited property was not the deceased’s main place of living then the main residence exemption won’t apply unless it was purchased before 20 September 1985. This means that the inherited property that was a holiday home or an investment property when sold will be a Capital Gains Tax event.


The main residence status holds significant weight in determining whether the property qualifies for exemption from capital gains tax. So, before selling an inherited property, it’s crucial to consider its history as the main residence or the acquisition date. By keeping this in mind, you can navigate the complexities of deceased estate CGT and make informed decisions about your inheritance.


What Do You Pay Capital Gains Tax For?

When it comes to CGT it’s essential to understand that shares and similar assets are generally not exempt. However, if the asset or share was purchased before 20 September 1985 then it will be exempt from capital gains.


CGT calculation for these assets are based on the purchase date, not the date of death. If the deceased held the asset for over a year, then you may qualify for the standard 50% CGT discount, which can be advantageous in reducing the tax payable. So, as you navigate through investments and asset sales, keep in mind the potential discounts based on the holding period to make informed financial decisions.


Foreign Residents And Deceased Estates

Deceased estates involving foreign residents can present unique considerations regarding capital gains tax (CGT). When an asset from a deceased estate passes to a foreign resident, CGT applies if the following conditions are met:


1) The asset was acquired by the deceased on or after the start of CGT (20 September 1985);


2) The deceased was an Australian resident at the time of their death, and


3) The asset is not considered taxable Australian property in the hands of the foreign resident beneficiary.


In such cases, the capital gain or loss is determined based on the market value of the asset at the date of death and the cost base. Understanding the specific tax implications for foreign resident beneficiaries is crucial to ensuring compliance and optimising the outcome for the estate.


It is important to keep in mind the complexities of foreign residents and deceased estates, it is best to consult with a specialist in foreign income and deceased estates or to consult the Australian Taxation Office.


What Records To Keep

In conclusion, navigating deceased estate capital gains tax requires careful attention to detail and record-keeping. Beneficiaries and legal representatives should maintain comprehensive records, including the market value of the property at the date of death and any related costs incurred during the process. 


These records play a crucial role in accurately determining capital gains tax obligations when selling inherited assets. As experts in tax and financial planning, Coleman Advisory is here to assist you in managing the complexities of deceased estate CGT. Reach out to us today for expert guidance and ensure a smooth and financially optimised journey through this process.