Death and taxes: often described as the two absolute certainties in life. But what happens when you die, and what taxes are payable?
For now, in Australia, there is no death duty or tax payable when someone dies. We are lucky since in other countries their death duty is often a significant percentage of the estate. In Australia, often probate is required, but this is not tax. This is a grant from the Supreme Court in your State, once the Will has been proved and allows an executor to deal with estate assets.
The taxes that you need to be aware of after someone dies, are income tax, stamp duty, and capital gains tax.
A final tax return will often need to be done for the deceased individual, for the current financial year up until the date they die. The deceased receives the same taxation rates as someone alive for the same tax period. The responsibility for doing this falls on the executor of the estate, or the legal personal representative. If this is not done properly, then the legal personal representative may become personally liable for the tax.
The legal personal representative often has to get a new tax file number for the estate, too, as a tax return will need to be filed if the estate earns any income before it is distributed (like interest or dividends).
In all States and Territories in Australia, when you buy certain property, the transaction will attract stamp duty payable. However, when someone dies and leaves a beneficiary an asset in their Will, the beneficiary isn’t paying for the asset they were gifted.
In Victoria, there is no stamp duty payable on the transfer of an asset to a beneficiary under a Will. In other States, there is sometimes a nominal duty payable when assets pass from a deceased estate to the beneficiaries.
If someone buys an asset, such as real estate, from the deceased’s estate (even if that person was partially a beneficiary) then there is stamp duty paid by the purchaser, just like if they were purchasing any other real estate. In this case, the purchaser may be entitled to a partial concession on stamp duty, as to the portion of the asset that they would have been entitled to under the Will.
Capital Gains Tax (CGT)
Capital Gains Tax is a tax payable on the gain that someone makes when selling or transferring certain assets.
After someone dies, assets are transferred to the estate to be disposed of in accordance with the Will. The general principle of CGT is that despite there being a change of ownership from the deceased to the legal personal representative as a result of the death, there is no disposal for CGT purposes. So there is no tax payable on this first transfer from the deceased person to their estate.
Nor does the passing of an asset from the legal personal representative of the estate to a beneficiary under a Will, constitute a disposal of the asset for CGT purposes. So if real estate (or another capital asset) is gifted to someone under a Will, there is also no tax payable, because the transfer does not amount to disposal for CGT purposes.
If the legal personal representative sells the asset directly, during the administration of the estate, then the estate may be liable to pay CGT.
When a beneficiary comes to sell an asset that they were gifted under a Will, the cost base is the market value at the date of death of the deceased, rather than the original price that the deceased acquired the asset for. This is a good thing because if the deceased had owned the property for some time, a beneficiary would not want to pay years of capital gains tax that they did not benefit from.
There is an exemption from CGT on the main residence. This continues to apply for two years from the date of death of the deceased so that the legal personal representative can sell the property within two years and not have to incur capital gains tax.
This article is written by Jacqui Brauman and was first published on the TBA Law website
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practising lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Legally Yours Pty Ltd accepts or assumes responsibility, or has any liability, to any person in respect of this article.