During the administration of the estate, the legal personal representative of the estate will be responsible for transmitting and selling or transferring estate assets. The legal personal representative will be liable for capital gains tax (CGT) if CGT assets such as shares or real property are sold by the estate (rather than being transferred to beneficiaries). It is important for the legal personal representative to understand CGT rules and the consequence of death to minimise the impact of CGT on the estate and beneficiary. The legal personal representative should be aware of the CGT exemptions available, paying particular attention to the CGT holding rule which may entitle a legal personal representative to a CGT 50% discount. Before disposing of any property, the legal personal representative should seek tax advice if they are not certain of the tax treatment.

CGT is the tax that a taxpayer pays on any capital gain made from the disposal of a CGT asset. The gain is included in the individual’s annual income tax return as part of their income. There is no separate tax on capital gains but rather it is a component of the taxpayer's income tax.

A capital gain is made if the proceeds from the sale of the CGT asset exceed the cost base of the CGT asset. A capital loss is made if the proceeds from the sale of the CGT asset are less than the cost base of the CGT asset. Generally, any capital gain or loss made on an asset acquired before 20 September 1985 can be disregarded.

See General definitions.

Pursuant to s 128-10 of the Income Tax Assessment Act 1997 (Cth), when a person dies, a capital gain or capital loss from a CGT event that results for a CGT asset the deceased owned just before dying is disregarded (rolled over). Further principles regarding CGT liability of a CGT asset is also discussed within the guidance note.

See CGT and death.

This guidance note explores the effects of CGT when passing a CGT asset to a beneficiary. In particular, the legal personal representatives should be aware of the CGT trap when distributing CGT assets to a foreign resident, charity or complying superannuation fund.

See Passing to a beneficiary.

If the legal personal representative or the beneficiary inherits a market value cost base, this will usually lead to a lower CGT liability for the legal personal representative or the beneficiary. This usually gives a better outcome compared to inheriting the cost base of the deceased when he or she acquired the CGT asset.

If the legal personal representative or the beneficiary inherits a market value cost base, this will lead to a lower CGT liability for the legal personal representative or the beneficiary. This gives a better outcome compared to inheriting the cost base of the deceased when he or she acquired the CGT asset.

See Inheriting the cost base.

In the event that the legal personal representative or the beneficiary is liable for CGT (the proceeds from the sale exceed the cost base of the CGT asset), the CGT liability can be reduced by 50% if the legal personal representative or the beneficiary held the CGT asset for 12 months or more. This 12 months ownership period can include the period of ownership of the deceased.

Foreign residents who were subject to capital gains tax on Australian property were eligible, for the 50% discount until 8 May 2012. Any assets acquired by foreign and temporary resident individuals after 8 May 2012 are no longer subject to the 50% discount; this includes beneficiaries of trusts and partners in a partnership.

See 50% discount if CGT asset held for more than 12 months.

During the lifetime of the deceased, the sale of the main residence of the deceased is exempt from CGT as it qualifies for the main residence exemption. On the death of the deceased, the main residence exemption can also be extended for the benefit of the beneficiary of the estate in certain circumstances. However, where an individual is a foreign resident at the date of death then the portion of the main residence exemption accrued by the deceased individual in respect of the dwelling is not available to the beneficiary due to recent changes in law.

On 9 May 2017 the Government announced that Australia's foreign resident CGT regime will be extended to deny foreign and temporary tax residents access to the CGT main residence exemption. Treasury has released an Exposure Draft containing the details of the legislation seeking to remove the CGT main residence exemption for foreign residents. The Exposure Draft proposes that the entitlement to the CGT main residence exemption will be removed for all foreign residents (ie taxpayers that are not resident for Australian tax purposes).

Accordingly, any capital gain or loss arising upon disposal of an Australian main residence by a foreign resident must be declared. As the legislation proposes to apply to “foreign residents”, which, by definition, are those taxpayers that are not “resident” for Australian tax purposes, the new legislation will also apply to Australian citizens or permanent residents who dispose of their Australian main residence whilst a foreign resident, eg while working overseas on secondment.

Properties held prior to this date will be grandfathered until 30 June 2019. Transitional provisions allow for foreign residents to still access the CGT main residence exemption provided the CGT event occurs on or before 30 June 2019 and the ownership interest in the residence was held throughout the period starting just before 7:30pm (by legal time in the Australian Capital Territory) on 9 May 2017 and ending just before the CGT event occurs. In this context, foreign residents who owned a main residence before 9 May 2017 may consider selling their main residence before June 30, 2019, should they wish to benefit from the exemption.

The Australian government in its 2017-18 Federal budget made clear its intention to restrict the CGT exemption for the sale of a main residence so it won’t apply to foreign or temporary residents. Accordingly, on 21 July 2017 Exposure Draft legislation in relation to implementing this change was released for public consultation. Then on 8 February 2018 the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018 was introduced into parliament and it contained measures that sought to remove the main residence CGT exemption where the owner is a foreign resident. This is to apply to all sales occurring after 30 June 2019 and also any sales of residences before this date if purchased after 7:30pm AET time on 9 May 2017. The Bill also seeks to modify the foreign resident CGT regime so that when it is to be determined whether an entity’s underlying value is principally derived from TARP, the principal asset test is to be applied on an associate inclusive basis.

The Bill additionally seeks to provide a CGT discount of up to 10 percent if a CGT event happens to an ownership interest in a residential premise that was used to provide affordable housing.

See Main residence exemption.

It is common in an estate for the deceased to gift their personal and household effects to a beneficiary, but not too many people are aware of the potential CGT issues with gifting of personal and household effects, which is discussed in this guidance note.

See Personal and household items.

During the lifetime of a small business owner, the sale of CGT assets used in the business may qualify for small business CGT concessions. The concessions are:

• Full CGT exemption for assets owned more than 15 years — if the small business owner is aged 55 or older and retiring or permanently incapacitated, and the business has owned an asset for at least 15 years, the small business owner is exempt from CGT when he or she sells the asset.

• 50% CGT discount for active asset — if the small business owner has owned an asset to conduct their business (an “active asset”), he or she only pays tax on 50% of the capital gain when he or she sells the asset.

• Full CGT exemption for retirement — there is CGT exemption on the sale of a business asset, up to a lifetime limit of $500,000. If the small business owner is under 55, money from the sale of the asset must be paid into a complying superannuation fund or a retirement savings account.

• CGT rollover — if the small business owner sells a small business asset and buys a replacement asset or improve an existing one, he or she can defer their capital gain until a later year or indefinitely.

On the death of the small business owner, the small business CGT concessions can also be extended for the benefit of the beneficiary of the estate.

See Small business CGT concessions.