Got tax queries regarding your property investments and wealth creation strategies? Our experts are on hand to answer them.
Q: I have just inherited one third of a unit in Sydney with my two sisters. We have put the property on the market and I am going to bid on it when it goes to auction. I am an Australian citizen who has been resident in New Zealand for 15 years. If I am successful at auction I will be paying full market value and I won’t receive my one-third share of the sale proceeds for another six to 12 months, when the estate distributions are made. What tax and/or CGT implications do I need be aware of? How can I mitigate these?
Regards, JG
A: Numerous tax and legal issues need to be considered when dealing with property in deceased estates, and your circumstances are further complicated by your New Zealand tax residency status.
Death itself does not generally trigger a CGT event. The CGT event is triggered upon sale of the property. In this case, the CGT event will be realised by the estate when the property is sold. Assuming the estate pays the applicable tax (if any) in relation to the sale of the property, you should not be taxable in Australia on the cash distribution you receive.
The tax implications of the sale of the property for the estate will vary depending on whether the property was acquired by the deceased person before or after 20 September 1985. If the property was acquired before then, the estate is deemed to have acquired the property at market value at the date of death. Assuming the property is sold soon after the date of death (and thus the market value has not changed), no taxable capital gain should be realised. As a result, the sale of the property will likely be tax-free.
"Death itself does not generally trigger a CGT event. The CGT event is triggered upon sale of the property"
If the property was acquired on or after 20 September 1985, the estate inherits the original cost base of the deceased. Unless an exemption applies, the taxable gain on sale will be equal to the sale proceeds received less the cost base (including legal and sale fees). Assuming the deceased held the property for more than 12 months, the 50% CGT discount should apply.
A common exemption that may apply is if the property was the deceased’s principal place of residence at the date of death. If that is the case, so long as the property is sold within two years from the date of death, any capital gain realised upon sale will be exempt from tax.
If you are successful in purchasing the property on market from the estate, the acquisition price (including legal fees and stamp duty) will broadly form your cost base for CGT purposes. Upon the future sale of the property by you, any gain realised will be taxable in Australia. As you are a non-resident of Australia, you will not be eligible for the 50% CGT discount. Further, if you are a non-resident at be included in your personal Australian income tax return each year. Note that the federal government’s recently introduced ‘vacancy charge’ may apply to you. While not yet legislated, on 9 May this year the federal government announced it would introduce an annual charge for foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least six months per year. It is not yet clear whether the charge will apply to Australian citizens living abroad.
Need to know
- Death does not necessarily trigger a CGT event.
- Tax implications vary depending on the date of property acquisition (before or after 20 September 1985).
- Non-residents are not eligible for the 50% CGT discount.
Ryan Smith
is financial advisory partner
at PricewaterhouseCoopers
