Tax Tip 242: Pre CGT Assets and Death

Tax Tip 242: Pre CGT Assets and Death


PreCGT assets are getting rare these days. These are assets purchased prior to 20 September 1985 which is about 34 year ago now.


Where an individual owns a preCGT asset such as a property that asset will generally always be CGT free. But this changes upon the death of the owner. The person inheriting the property will inherit it with their cost base for the property being the valuation of the property at the date of death.

Example

Grandpa Simpson bought an investment property in 1994, before CGT was introduced. He paid $30,000 and it is now worth $3mil when he dies.

His assets pass via his will to his son Homer. Homer keeps renting the property out for a few years and then sells it for $4mil. He will pay CGT on $4mil - $3mil – other cost base expenses then applying the 50% CGT discount.


However, where a trust held a preCGT asset this is even better because the death of the person is not going to reset the cost base. The trustee of the trust will be able to sell that property CGT free long after the death of the person who set up the trust.


Example

Grandpa Simpson also set up a discretionary trust in 1984 and bought another property as trustee of the trust.

On death a new trustee will be appointed and this becomes Homer under the terms of the trust deed. Change of the trustee will not trigger CGT.

Homer as trustee holds onto the property for the next 20 years, and then he dies and his son Bart takes control of the trust and the property and sells it a few days after his dad’s funeral for say $8,000,00

This sale will be CGT free because the sale is by the trust and the property is still a preCGT property.

If you grandparents had the foresight to buy property before 1985, you should be thanking them and if they had set up a discretionary trust to hold property thank them even more.

 

Not all pre 20 September 1985 assets are pre-CGT CGT assets. This confusing conundrum can affect vacant land. Especially where it has been held for future resale at a profit.

I will use a large lot of land at Badgeys Creek Sydney as an example. Barney bought it in 1984 based on whispers that Government people are looking at the idea of a new airport in Sydney. PM Hawke years later announces the land was being acquired and proposed an airport at that very site. However, nobody bought Barneys land and it came up several times over the years. Eventually around 2015 talk started to develop and Barneys plans to sell started to realise. He had offers but knocked them back knowing one day he would sell for millions when the airport was really announced. He called it his super and told all he would probably sell when he was a old man. He kept holding it. It didnt produce any income and was just raw vegetation. He didnt even approach anyone to seek approvals etc. He continued to hold it until 2018 when he finally agreed to sell to the developers of the new airport surroundings.

Barney may well have an isolated profit making intention and also be subject to GST although he may easily argue he never conducted an enterprise and GST doesnt apply. He may need to seek tax advice and present an argument in a binding private ruling that he wasnt conducting a enterprise and didnt have a profit making intention. He would argue he was holding it to realise a gain but that very argument suggests a profit making intention. The super argument could assist him or may harm his isolated profit making views. His original 1984 intention to resell one day when a airport is built (for profit) will be a key factor.

What is important to realise is tax law has always taxed isolated profit making as income. CGT is a "modern" tax.

 

How does one establish that the Simpson's property was worth $3mil at death? Does Homer need to get a registered valuer a few days after Grandpa's death to value the property? Or 3 different valuers and take the median price? If so, I'd presume Homer would try and get the valuer to value the property as highly as possible for him. I'm presuming real estate agent quotes wouldn't be sufficient?

 

The inheriter would be wise to get a valuation done and to aim for as high as he can. A real estate agent could potentially provide something enough to establish the value but would need comparable sales etc.

 

A value is needed for probate and also for the estate distribution etc. Is a reg valuers required ? No but it may be more sound that a basic 1 page REA opinion. I suggest people seek the highest opinion...Sometimes that may mean three different views. Agents are often keen to nab a estate sale (even if it is a maybe) and can be very obliging to provide sales data etc in their opinion.

The inheriter can use the valuation cost as a element of their CGT costbase even though its paid by the deceased estate