Tax Tip 289: CGT on Inheritance left to one person when put into different names

Discussion in 'Accounting & Tax' started by Terry_w, 28th May, 2020.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    Tax Tip 289: CGT on Inheritance left to one person when put into different names

    Sometimes people don’t realise what they do will have tax consequences. One issue I see is a parent may die and leave something, such as property or shares, to their adult child. When probate is administered, they get the property or shares put into their spouse’s name either solely or jointly. This is usually done with the aim of saving tax on the income generated by the asset as Marge is not working and has no income.

    This will trigger CGT – and possibly stamp duty too if property.


    Example

    Grandpa Simpson dies and leaves his shares to Homer. Homer and Marge are married and own everything jointly and so when probate happens Homer gets the executor to transfer the shares into his name and Marge’s name as joint tenants.


    Later they get audited and hit with a CGT bill. Homer has essentially transferred 50% of the shares from himself to Marge for market value.


    Let’s say Grandpa bought them for $100,000 10 years ago and they are now worth $1mil. The cost base of the shares is basically $100,000.

    If they are now worth $1mil, then half of them are worth $500,000 and that would trigger a capital gain of $450,000 when they go into Marge’s name.

    Homer is considered to have disposed of those shares and he will be taxed on the full $450,000 less the 50% CGT discount = $225,000 added to his other income. This will generate a tax bill of up to $105,000 for Homer.

    Had the will been flexible or incorporated a TDT or testamentary discretionary trust the CGT could have been avoided.



    Something similar happened in this case – which should never have been litigated (as there was no hope):

    Murphy and Commissioner of Taxation [2014] AATA 461 Murphy and Commissioner of Taxation [2014] AATA 461 (2 June 2014)
     
  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Good point Terry. I have a complex (tax) situation about to go the The Commissioner

    Parent had two kids - One disabled. Parents bought disabled child house next door to assist with independence and care,. Title in parents name but on death their will passes property to spouse and then to the other adult child (which has now occurred) and clearly describes this use of the apparent asset . Each will clearly sets it as a life interest for the disabled child (now a adult). The child beneficicary (adult) person lacks legal capacity. Arguement is it a trust interest and the childs own main residence through a "interest" eg life interest.... CGT savings could be $200K plus. Property is being sold now the (adult) child has been given NDIS accomodation etc by the sister of the adult child who queried the tax issues... Shame it wasnt given better legal advice long long ago

    Names dont always reflect a interest and sometimes it does.