Tax Tip 382: Inheriting shares and CGT

When a person dies and leaves their shares to someone else there is generally no CGT triggered (if resident). Transfer to the LPR and then to the beneficiary doesn’t trigger CGT. CGT is only triggered if the shares are then disposed of by the beneficiary.

The Cost base of the deceased resident taxpayer generally becomes the cost base of the person that inherits the shares. However, where the shares were purchased by the deceased person prior to the introduction of CGT (20 Sept 1985) then the cost base for the person that inherits those shares will be the value of those shares at the date of the death.


Example

Homer bought some shares for $1000 in 2012 with $20 in brokerage fees. He is thinking about selling them in 2021 when they are worth $10,000 but he has a heart attack while he waits for his computer to boot up and dies.

His will leaves the shares to his son Bart who holds them for 2 more years and then sells for $11,000.

Bart works out the capital gains by deducting the cost base expenses from the sale price

$11,000 - $1,000 - $20 - $20


Note that the Capital gain would have been the same had Homer lives to sell the shares himself on the same day and price as Bart. But they may have paid different amounts of CGT.

Also note that had the estate sold the shares this would have resulted in a still different amount of tax payable.

 

We see many cases where the former owners costbase isnt known or is incomplete. Especially long term share owners. eg Dave worked for Coles Myer in 1990 and since then there have been many changes where Myer became Coles Myer and then Wesarmers took control. Then share reconstructions of WES, capital returned and the most recent is the demerger of Coles Supermarkets from WES.

Anyone who is a potential beneficiary is wise to ask the owner to determine if they have great CGT records and where they are. If a copy is held by their tax agent or in a accessable place etc it can save a lot of cost. Its one of the things we do for our retiree clients. And in possibly 50% of cases we have to assist them to reconstruct their holdings. We often find strategies when we do this eg to realise CGT losses etc.

 

Would it make sense to sell some of the shares within the estate as the estate is taxed as a separate individual?

 

It can be a strategy worth considering as the estate gets a separate tax free threshold for up to 3 years.

 

Better off leaving property in your estate in my opinion.

 

That doesnt impact CGT however. When legal title changes that merely discharges one CGT asset (the right) for the legal title.

There can be messy legal outcomes from leaving property in former names etc. Its not that uncommon to find Grandpa dies and the house is his name. Its never transferred to Grandma. Fast forward a decade or so and then Grandma dies and it adds some complexity to prove the beneficial entitlement especially if there was no will.

 

Isnt the whole point to have a well written will, and educate the executor and beneficiary well before death?

 

It is rare for someone to educate their executors I think.

 

That is what I have been doing as well as reviewing my Will periodically. I think I do have an obligation to make the admin of my estate as least burdensome as I can for my executors e.g good clear records maintenance, no physical clutter left & speaking plainly on these matters.

 

so is being rich from investing. We all still try tho.

teaching the kids how to manage an inheritance should be part of teaching them to invest.

 

You can educate them but how they use that knowledge is up to them.

Many people confuse "teaching" and "learning" which are akin to talking and listening which are both miles apart from communication and comprehension. And since we all went to school we think we have the skills but we lack the skills a teacher has to educate and reinforce knowledge.