What A Mess!! What An Idiot!!!

Firstly, a little background info:

About 20+ years ago, a good friend of mine inherited 3 x properties (worth about 2.5M to 3M in today's dollars) - let's call them A, B and C and the date of acquisition/inheritance D1.

For many years, they lived in A as their PPOR but, due to financial difficulties, they were forced to sell A to pay off personal debts. Let's call the date of sale/contract D2. They then moved into B.

Then, for a number years, they lived in B as their PPOR but, due to further financial difficulties, they were forced to sell B to pay off personal debts. Let's call the date of sale/contract D3. They then moved into C.

They then pass away unexpectedly. Let's call the date of death D4. On reading of their Will, his sister and I are nominated as their executors.

Secondly, my question is regarding CGT:

From our initial research, it appears that my good friend hasn't sumbitted a tax return for many, many years. I am trying to get my head around what CGT should have been paid/is due for each property.

Following is my understanding but I am happy to be corrected:

1. Property A - no CGT is due or payable as it was their PPOR for their whole period of ownership, D1 to D2.
2. Property B - CGT is due/payable for the period it wasn't their PPOR, namely form D1 to D2.
3. Property C - CGT is due/payable for the period it wasn't their PPOR, namely form D1 to D3.
   
4. Property C - no CGT is due or payable if the executors dispose of this property within 2 years of the owner's death. That is, if it is sold before D4+2 years.

Is the above correct?

Obviously, we will seek professional advice from an accountant/tax agent but I would rather get the correct understanding of the principles before seeing them OR getting bogged down in the actual CGT calculations.

I assume there could be penalties to be paid for not having submitting a tax return for years.

Any thoughts/opinions would be appreciated.

 

If B and C were rented then its probably easier to determine and pro-rata basis applies. Tip : Determining dates might be determined based on things like utilities billing data
When did they inherit ? The market val at that date can be determined by a valuer perhaps. Thats the costbase.

As executors the issues include:
- Individual returns for the deceased incl rents and expenses (likely no interest deduction on inherited property)
- CGT amounts in returns
so a tax liability can be determined....ATO are a beneficicary !!
- Determining potential gain / loss for determining beneficiary costbase OR if sold as part of estate then tax payable prior to final distributions.
- is there a unregistered land tax issue ? Ltax clearance at transfer or sale can lead to that being detected and arrears will be due. Executors should consider this and it will be detected later.

Its common. Its often a surprise too that people can inhert $Xm of property and get into a financial mess. I dont get it. I have had to fix a lot of these issue in my time. They often arent that hard if executors assist the tax adviser. Keeps cost down.

Penalties cant apply if the deceased are dead. Its the executor fixing things and ATO will be fine and even a application for remission in the worst case. Ato are good with these cases. They are happy someone is fixing it. But dont ignore it as the executor is liable.. Its possible their TFNs need to be reactivated too !! I have seen that.

 

If the deceased are not dead what are they?
Does the ATo have a zombie classfication?

 

You need professional advice, obviously. None of the following is advice, but a couple other things you want to find out and questions your want to ask.

Were properties A, B and C acquired prior to 20 Sep 1985 by the original deceased?
Were A, B and C ever the PPOR of the deceased who your friend inherited the properties from?

If A and B used to be IPs before your friend inherited them, is the cost base the actual acquisition cost by the original deceased? If so, what period is used for the apportionment calculation? Is it longer than your friend owned the properties?

Paul, if C was the friend's PPOR at time of death, does s 118-195 and s 118-190 ITAA97 apply and the inherited cost base is market value at time of death? i.e. no apportionment?

 

There are lots of issues here and as others have said, the executors will need tax and legal advice specific to their circumstances.

Re: Your Point 1 - A is not necessarily free from CGT, as it depends on the use of the property prior to the inheritance.

Good luck.

 

People have pondered this since before Adam was a boy

 

We can ask sleeping beauty

 

1. Potentially, but not necessarily

2. Nope, cost base would be the cost base of the deceased and then apportionment needed

3. As above

4. No


My advice would be not to accept the position as executor, too dangerous.

 

Thanks @Paul@PFI for your detailed post.

B and C were never rented in the 20+ years. I know, WTF!!!

I don't have an exact date but my thought was to get a valuer to determine the cost base for B and C.

Because there was no income, the deceased hasn't submitted a tax return for years. Idiot!!!

That is what we are trying to determine, the CGT liability. I like the phase "ATO are a beneficicary". So is the SRO.

Fully understand that.

I didn't think of that. Apparently, the SRO was after their Land Tax monies and the deceased was requesting a hardship exemption. Good luck with that when one owns $xM in assets.

I was more than surprised, I was stunned!!!!

That is exactly our approach.

We see ourselves as the messager - so please don't shoot the messager!!!

That is pleasing to hear.

 

I don't know.

I don't know.

Lots of questions and complexities. That is why we will be seeking professional advice.

 

Currently, the sister is the sole executor.

I have been nominated as the alternate executor if the sister passes or resigns from the role. My strategy is to support her so that I am never asked to become the executor. If asked, I will seriously consider not accepting the role due to the risks, both known and unknown.

 

If the properties were not rented this is a bit easier.
1. Date of inheritance likely date for valuation. If unavailable perhaps the date title changed ?
2. Third element costs ? eg rates, etc....Council etc may be of assistance. Have done this for tax appeal cases.

Hardship for land tax - Funny. Land tax is a first charge. There may already be an accrued tax debt. Its also not uncommon to find unpaid rates. Council can enforce a sale however. OSR can be reasonable with requests to remit penalties and interest sometimes.

Advice should address a plan for all the possibles and then allow the parties to find the data and this should assist costs to be minimised. Doesnt sound like its that bad since there was no undeclared income / rents etc.

Is B or C land which adjoins A ? That could also provide some concession/s

 

I believe the sister has paperwork with the date of inheritance. If not, I will suggest date title changed.

Thanks for this tip. It confirms what I have already told the sister.

I surmise there is already a Land Tax debt. We will just have to reach out to SRO and resolve the situation.

I understand rates are fully paid up. Maybe my friend knew the Council could force a sale.

No. All in different suburbs.

Further information has come to light:- my friend inherited the three properties from their uncle and their cousin (two Estates). Both the uncle and the cousin inherited the properties from their respective parents years before 1985.

Given that all three properties were last purchased way before CGT was introduced and that an inheritance is not a CGT trigger event (my understanding), does having the properties going through two inheritances preserve this status?

 

A friend of mine was passed down an executor to a will from his mum when she had passed, it had taken over 3 years to find the beneficiaries in another country that he couldn't speak the language, the estate was worth in the millions, and he managed it for 3 years.

 

Cost base would have been value at the date they inherited it.

 

So CGT is still applicable, inheritance is a CGT trigger?

 

Only two beneficiaries in our case, both are locals.

 

hi terry, just confirming, a pre cgt 1985 asset used solely as an ip loses its pre cgt characteristic when passed through a deceased estate to a beneficiary? ie same outcome as the ppor of the deceased (reset cost base to market value at date of death)?

 

If Grandpa SImpson owned a property purchased in 1984 he might have left it to Homer.
If Homer lived in it all his life and died he might leave it to Bart. No CGT yet.
Bart lives in it all his life and leaves it to Lisa who rents it out. Cost base for Lisa would be the value as of Bart's death.

Had Homer rented it out the cost base for Lisa would have been the value when Homer died.

 

The inheritance of the pre-CGT asset would mean the beneficiaries inherit the cost"date" at the date of death and the market value is used. The asset is no longer a pre-CGT asset. A valuer can determine what that should have been in the absence of other records.

Subsequent inheritances MAY occur at the same cost and date. However if a beneficciary lives in the property and at the time of their death they were resident and eligible for the main residence exemption (or absent in a eligible way) this could alter things. eg Bart's death in Terry's example resets the costbase to market value again since Bart lived in the house at death