Australia: Oh those deadly taxes - relating to estate administration

It can be a surprise for executors and beneficiaries, that the issue of tax is raised when administering the assets of the estate. Many clients tend to assume that all the assets upon transfer to a beneficiary are exempt from many forms of tax such as stamp duty, land tax, capital gains tax (CGT) and GST. This is not the case.

Land Tax

On death of an owner, the rule is that where a parcel of land is eligible for the principal place of residence exemption under Clause 9 of Schedule 1A of the Land Tax Management Act 1956 (NSW) (LTMA), then unless the land is generating income from rent, an executor is allowed 2 years from the date of death of the deceased within which to sell the principal place of residence or to transfer it in specie to the beneficiaries, to avoid that real estate attracting land tax in the hand of the executor.

After 2 years, if the property is gifted to the beneficiaries, the beneficiaries would need to occupy it as their principal place of residence for the real estate to retain exemption from land tax liability. Equally, if the Will allows a right of residency to any person, then the exemption continues during the residency period. If the property is not used as the principal place of residence, then the exemption is lost from the date income is generated from the use of the property.

If the land was formerly treated by the deceased as only partially their principal place of residence, then, the non residential part would not be exempt, unless the deceased secured another exemption, for example the primary production exemption, for that part.

The primary production exemption ceases to apply to land upon the cessation of the use of the land for a primary production purpose, regardless of whether or not the zoning of the land continues to allow primary production. So, if the deceased was the sole operator of a primary production use, on his death, any primary production exemption would cease. The primary production exemption is difficult to secure initially, so, an executor should check whether or not the deceased was relying upon it at all.

Assuming land tax exemptions have been lost, the executor is obliged to file a land tax return in the year following 31 December when the land first became assessable.

Against these principles there is a discretion held by the Commissioner to extend the dates from which liability arises because, for example, family provision litigation has delayed an executor from either selling or transferring the land to the beneficiaries within the time periods.

Capital Gains Tax

No CGT is realisable on the sale of the property if it was acquired by the deceased prior to 20 September 1985. Section 118.195 of the Income Tax Assessment Act, 1997 (Cth)("ITAA97") provides that a capital gain is disregarded if the deceased acquired an interest in the property prior to 20 September 1985 and the CGT event was brought about by the passing of the ownership interest to a beneficiary.

If the dwelling was also the main residence of the deceased prior to their death, then under section s118.192 of ITAA97, the beneficiary has 2 years, from the date of death of the deceased to sell the property without any CGT consequences.

If the dwelling remains the principal place of residence of a beneficiary, or a person left a right of residence under the deceased's Will, then there is provision in the ITAA97 for the Commissioner to extend the exemption during the period of that residency.

The main residence exemption only applies to land up to 2 hectares. The cost base for determining any CGT calculation is the market value of the property as at the date of death of the deceased. Where the land exceeds 2 hectares, the main residence exemption will only apply proportionately.

If the property was sold after 2 years of the date of death of the deceased then CGT will be applied proportionately. CGT will also apply proportionately if from the date of death of the deceased the residence was used for income producing purposes (for example, where rent is being collected).

If the property was acquired post 1985, then the capital gain will be calculated on the cost base relevant at the time of acquisition by the deceased, compared with the sale price of the property in the hands of the executor, or beneficiary after a delayed sale . The cost base would include any stamp duty or legal fees incurred by the deceased on acquiring the property, and from the sale price, expenses that will be deducted include the agent's commission, legal fees, auction costs, advertising costs and any capital expenditure incurred (provided records are still held), to determine the net capital gain.

There is provision under Section 118.200(3)(b)(ii) of ITAAA97 for the Commissioner for Taxation to exercise his/her discretion to extend the 2 year period to a longer period for the purposes of calculating the CGT liability. So, again, if the executor is precluded from selling a property during a litigious contest concerning the estate, the Commissioner may extend the exemption period for the duration of the litigation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.