The importance of getting the right advice
To keep it simple, Capital Gains Tax or CGT is the tax applied to any financial gain made from selling a capital asset. The difference between the sale proceeds of the asset (i.e. the price the asset is sold for) and the value of the asset when it was purchased or acquired, generally equates to the capital gain or loss.
It’s a fiddly area because depending on the situation and type of asset you are looking to part with, there are a host of different exemptions and discounts that may be available to you.
For the purpose of this article we are going to look at CGT on inheritances. So when does it apply?
The good news is, if the inheritance is cash, whether it’s $10,000 or $100,000, there will be no CGT to pay. The only tax payable will be on the interest earned with these funds sitting in a bank account.
When it comes to assets such as shares or a house, it gets a little more complicated. This is why it is important to get advice BEFORE you receive any inheritance. Even executors may find it in their best interests to seek tax advice prior to any distributions being made to beneficiaries.
Generally the CGT will only be applicable when and if the asset is sold (by either the estate or the beneficiary) and not when the asset is distributed to the beneficiaries.
How is CGT is calculated?
Should there be a decision to part with the asset, the basic formula for working out CGT is:
Funds received from the sale, MINUS the value of the asset at purchase or acquisition, PLUS costs associated with obtaining, holding and selling the asset.
If the end result is a capital gain, we can often apply a discounts or specific concessions. The remaining balance will then be taxed at your individual marginal tax rate for that year.
If it turns out that you have made a capital loss, therefore the asset has cost you more than what you received at sale, this loss can be carried forward indefinately and be used to offset most capital gains that you may make in the future.
When it comes to selling, the timing of the sale can be everything!
The decision on when to sell an asset can often affect how much CGT is paid and the discounts that are available.
In order to receive a 50% discount on a capital gain, the asset must be held for a period of 12 months from the date you are taken to have acquired it, so we first need to confirm if the asset is pre or post CGT.
For an asset that was purchased pre-CGT, it is taken to be acquired by the beneficiary on the date of death of the deceased. Whilst assets that are purchased on or after 20 September 1985 are deemed to be acquired on the date that they were originally purchased by the deceased.
The amount of time you should hold inherited shares to receive the 50% discount will completely depend on whether the shares were purchased pre or post CGT.
If it’s a property however, there are other concessions and exemptions in addition to the 50% discount that may change the CGT calculation. This could include what it was used for (i.e. investment or main primary residence).
To calculate CGT for all assets, the actual amount of tax payable will be determined by the above factors and the personal income of the beneficiary for that year.
To be able to obtain tax advice for your own personal situation, we would recommend setting up a spreadsheet or just start some good old fashioned record keeping for the life of the asset.
For property assets, we would recommend keeping copies of all of the property holding costs, such as council rates and insurance. We may also suggest a property valuation be prepared, if needed.
If it is share type assets, then we advise that all Dividend Reinvestment Plan (DRP) statements be kept, as these will add to the cost of the asset when it comes time to sell. DRP statements are generally sent out every six months.
But as a bare minimum, always keep any legal documents that relate to the buying or selling of any asset as this will help your tax accountant provide you with the best advice for your own situation.
