Tax Tip 152:CGT won’t apply to me as I will never sell: 6 Reasons why it might

CGT won’t apply to me as I will never sell: 6 Reasons why it might

A phrase I often hear is that “I don’t care about CGT because I will never sell”.

But CGT will still matter and should be considered and planned for because of 6 main reasons:


1. Change in Circumstances
Circumstances always change and often this can lead to the sale of a property that you thought you would never sell.
Some possible reasons why you may sell:
a) Need the money for something
a. Medical emergency
b. ‘Living it up’ spending
b) High offer received (maybe from a developer)
c) Fear that the market has peaked.
d) Wanting to spend the children’s inheritance

2. Capital Account to Revenue Account
If you later decide to develop the property if it goes from capital account to revenue account there could be a deemed capital gains triggered with tax being payable before anything is even sold.

3. Debt Recycling Strategies
You might to decide to transfer ownership as part of a debt recycling strategy such as:
a) Transfer from 2 names to 1.
b) Transfer from spouse A to spouse B

4. Restructuring
You might just need to restructure the ownership for a variety of reasons
a) Debt recycling as above;
b) For land tax savings;
c) For estate planning purposes;
d) For asset protection purposes.
This may involve selling outright, selling to a related party, or changing ownership percentages.

5. Estate Planning
You may want to transfer the property to your children either as a gift or an under market value transfer.

6. Death
If you never sell then any property owned will be passed on via your will or the intestacy laws if there is no will. Death is not a CGT event and neither is the transfer of property to an executor, trustee or a beneficiary, but…

CGT will apply when the beneficiary sells the property. The cost base of an investment property for a beneficiary will generally be the cost base of the deceased. So the beneficiary will pay CGT as if he or she were the original owner.

It is good to help your beneficiaries, the heirs of your estate, to benefit from minimising the tax on the sale of the property.

-
There are probably a few more reasons too.

Considering the above it is always important to consider that a property may be sold and to therefore try to reduce potential future CGT liabilities as much as possible.

 

7. Change in Laws

I have seen several people sell properties, including myself, because of change in laws such as tenancy laws, land tax and tax such as not being able to claim travel anymore.
Anyone with property in Victoria might be in this category with increase land tax, invention of other taxes, and a proposal to cap rents.

 

Someone someday will need to know what the CGT costs was....Its very common no records are maintained and it can be reconstructed. ATO are surprisingly good at it when doing default assessments. I consider it a executor responsibility to ensure beneficiaries know a costbase or that the executor correctly pay tax. However its often a crude calc for property and it may understate the cost. This applies to real property.

We see people sell property when they develop a terminal illness. And despite their intentions and plans to sell down over time its several CGT events in one year. Like women in childbirth "nest", many with terminal illnesses simplify their own estate planning and "get their affairs in order"and tax isnt their main focus.

There is also a hidden one many fail to consider. Super fund property with our without loans. The terminally ill person may sell the asset in expectation of a death benefit that MUST BE CASHED. They can get quite anxious about the burden and even seek funds out prior to death. Also can apply to trust property.

For shares and ETFs it can be a diaboloical mess. And be VERY expensive to address. Had a old clinet die leaving a huge portfolio that she had accumulated over decades. She had a old ledger she kept but stopped maintaining it 15 years before her death. I had a aweful time at the mitchell library seeking decades old share info from the fin review because she didnt actually write down the COST of what she bought. The dates and qty were fine. Family though she was penniless. She had close to $2m+ and sold "shack"at Bondi with land worth a mint. Calc the pre-CGT shares was very important. The bondi land was the easiest. Title seach showed it was pre-CGT. Family and soliictor were fussing about for the deed when the data is on computer.

Another terminally ill client had been a heavy Westfield investor over time. They also had a few hundred thousand of c/fw tax losses that would end on their death. So asale of shares was planned to use that up. Splits and demergers and re-mergers and consolidations and return of capital and so much. A few days work assisted by the registry who gave me a excel tool.
Simpler ones are Wesfarmers / Coles and BHP.. Just did a estate the other day with such shares held long term. Most were simple but one had me stumped and eventually I found the capital reissue of former shares into new shares of the new owner company. And I found a 20 year old PDF that solved the puzzle.

 

Also see a LOT of people who dont include CGT losses as they occur and they later want these reinstated. It complex and a risk so needs checking. Now imagine someone dies....Nobody even knows about the losses etc. And yes the ATO can seek support for past losses when they are used. If others dont have this info it could be disallowed.

 

Its best to record everything and to give others access in the event of your death something I need to improve myself too