Tax Tip 300: Strategy to Avoid Triggering CGT on Death with Non-Resident Children

Last tip I mentioned that if a person leaves Australian shares to a non-resident beneficiary this could trigger CGT for the estate even if the shares are passed on without selling. Check it out:

Tax Tip 299: CGT Trap if Leaving Shares on Death to a Non-Resident Beneficiary Tax Tip 299: CGT Trap if Leaving Shares on Death to a Non-Resident Beneficiary


The way to avoid this is to leave shares to resident beneficiaries and other assets to the non-residents. But the difficulty is knowing where your children, or other beneficiaries, will be living at the time of your death.


To avoid trying to make a guess you could structure your will so that any shares pass to a Testamentary Discretionary Trust, so this trust could hold the shares until the beneficiary returns to Australia and becomes a tax resident again – they could then be sold, or even transferred across (don’t do that!) or just left in the trust.

Income from the shares could be diverted to other beneficiaries who are residents or to a bucket company set up to hold the dividends. The shares could even be sold with the capital gain passing to a resident beneficiary who would then get the 50% discount as well – consider some potential s100A issues.


Example

Continuing on the example from last time. Homer dies and leaves $1.5mil worth of shares to Lisa who is a non-resident. The cost base of the shares is $500k which would result in a $1mil capital gain.


If Homer had incorporated a TDT in the will for each beneficiary, Lisa could have instructed the executor to appoint an Australian resident trustee. Perhaps a company with at least 1 resident director.

The trustee being Australian would mean no CGT is triggered on the death. But if the trustee sells the shares and the capital gain is passed to Lisa she would be taxed as a non-resident anyway. So, she suggests to the trustee that the shares are kept and a bucket company is set up to receive the dividends on the shares. The bucket company is a resident and pays 30% tax on the dividends and then reinvests the rest.

After 10 years Lisa comes back to Australia and takes over the trustee control and the bucket company. All the extra compounding with less tax has paid off and she goes and lays some fresh flowers on Homer’s lawyers grave as well as Homers.

She lives happily ever after, until she is kills but a black panther in the Blue Mountains one day. Her last words were ‘I haven’t done a will as I didn’t expect to die so soon’.

 

Hi Terry $1.5M - $1.0M cost base = ??? Capital gain?

 

ok, i admit it, I can't add up!