Inheritance and Capital Gains Tax

by | Nov 24, 2021 | Wills & Estates

What is Capital Gains Tax (CGT)?

A capital gain occurs when an asset is sold where the sale amount is greater than the amount paid for the asset (cost base).  Essentially, it is the profit made on an asset (subject to some qualifications and discounts).

The capital gain is not a separate amount to be reported to the ATO and is added to your annual assessable income and taxed at the applicable rate.

CGT relates to property and shares as well as other assets such as business assets, contractual rights, etc.

Generally, when ownership of property is transferred for another person or entity, a capital gains event is triggered regardless of whether funds have changed hands or not.

So what does this mean for property that is inherited?

Do beneficiaries pay CGT on property inherited?

Where a beneficiary receives transfer of ownership from a deceased estate, the transfer itself if not a capital gains event and no CGT liability arises.  However, if a beneficiary decides to sell the property, a CGT event will be triggered and CGT may apply.

Some special rules apply when a beneficiary sells an inherited property from a deceased estate.  There are some relevant factors to be considered including:

  • The date the property was acquired by the deceased;
  • Whether the property was the main residence of the deceased or whether it was used for the purposes of producing income;
  • The date of death of the deceased;
  • Whether the beneficiary is an Australian resident for tax purposes when the property sold; and
  • Whether the deceased was an Australian citizen at the time of their death.

Based on these factors, a beneficiary may receive a full or partial exemption of any CGT liability incurred on inherited property which is disposed of.

Inheritance prior to 20 September 1985

Under the CGT rules, if the deceased died before 20 September 1985, it is known as a pre-CGT asset.  This means that when a beneficiary sells the property, they will receive a full exemption from any CGT liability.

However, there could be CGT payable if the property has had any major capital improvements done on or after the date of inheritance for the purpose of producing an income.  It is possible that part of any capital gain from those improvements made after 20 September 1985 will be taxable.

Inheritance after 20 September 1985

If the deceased had purchased the property before 20 September 1985 but you inherited it after this date, CGT may be exempt under certain circumstances:

  • You have sold the property within 2 years – if the property was the main residence of the deceased and the property is sold within two years, CGT will be fully exempt; or
  • You have used the property as your main residence – if, after inheriting the property, you use it as your main residence and it was still your main residence at the day you sell it, CGT will be fully exempt.
Partial exemption

If neither of the above exemptions are available, it is still possible to receive a partial CGT exemption in some circumstances.

How can Nevett Ford help?

If you are an executor or an Administrator of a deceased where there is property to be dealt with, or if you have inherited property and now wish to sell, it is important that you consider any potential tax liability.  Our Wills and Estates Team as well as our Property Team can assist you and can be contacted at melbourne@nevettford.com.au or on +613 9614 7111.