Wills and capital gains tax (CGT) issues.
When a person writes a will, they usually leave their assets to their children — and often in equal shares. When that first will is made, the children may be young — and the will-maker may also be relatively young when they update it later.
However, there’s a potential capital gains tax (CGT) issue lurking in this common arrangement.
The Problem: Beneficiaries Living Overseas
In today’s increasingly globalised world, when children eventually inherit the assets, they may be living overseas.
If a beneficiary is considered a foreign resident for tax purposes at the time they become entitled to their share of the estate, the CGT rollover does not apply. Instead, it triggers an immediate CGT liability for the deceased person — and that tax is payable in their final tax return.
The result? The executor must usually pay that tax out of the estate, reducing the pool of assets available to all beneficiaries.
The amount of the capital gain (or loss) is calculated based on:
- The market value of the asset at the date of death, and
- The deceased’s original cost base for CGT purposes.
Important: Carve-Out for Australian Real Estate
There is a critical exception: this rule does not apply to:
- Australian real estate, or
- Other “taxable Australian property”, as defined under tax law
These types of assets are always subject to CGT, regardless of the residency of the person who inherits them. The ATO can also usually track these assets, especially land.
What About Shares and Unit Trusts?
The issue does apply to:
- ASX-listed shares, and
- Units in ordinary investment unit trusts
There are special rules for companies or unit trusts where:
- You own more than 10% of the shares or units, and
- More than 50% of the entity’s value comes from real property
These rules are very complex, and professional advice is strongly recommended.
The Key Takeaway: Wills Should Be Tax-Aware
When writing or updating your will, it’s important to get good tax advice. Structuring your estate plan in a tax-effective way can reduce unnecessary tax and maximise what’s passed on to your loved ones.
One strategy involves giving your executor discretion in how assets are distributed among beneficiaries — allowing them to take into account the tax implications of each possible distribution.
Already Have a Will? There May Still Be Options
If you already have a will and find yourself affected by this situation, it’s not too late. There may be ways to ameliorate the impact of these tax rules.
Another Tip: Give a Right to Occupy
It’s also worth considering giving your executor the power to grant someone a right to occupy your home after your death. This can, in some circumstances, help access the main residence CGT exemption for an inherited property.
More information
Need will preparation advice that avoids CGT?
If you’re writing your will — or even just updating it — come and speak with us first. We’ll help you understand the tax implications and guide you through how to structure your estate tax-effectively.
It’s about protecting your legacy — and making sure more of it goes to the people you love.
Based in Noosa, on the Sunshine Coast Queensland, we work with clients throughout Australia.