Posted on June 5, 2020
If you care about your loved ones it is important to keep your affairs in order. This will help your beneficiaries to easily establish what assets form part of your estate in order to distribute them in accordance with your wish.
One of the common problems our clients face when a parent passes away is to worry about the financial records evidencing the assets of the deceased.
Many Australians love investing in the share market and own a long list of investments acquired on floats more than 30 years ago. Many listed companies have undergone various share capital reconstructions since then or merged with other companies. Bonus share issue and dividend reinvestment plans are also commonly offered to investors.
Our clients hear us often talking about the “cost base” of their investments in shares or units in trusts. We always stress the importance of having a full record of when the investment was purchased and its cost base which includes the purchase price, additions through dividend reinvestment or bonus issues and reductions for buy backs and tax-deferred distributions.
Why is it so important top keep the cost base information?
One of the main reasons to update the documentation of your portfolio is to get the Capital Gains Tax (CGT) right and avoid triggering unnecessary tax liability. Not just for yourself but for your family when they inherit your assets on your passing.
The following scenario illustrates the importance of keeping accurate records of the cost base of your investments.
Scenario: Lisa owns a parcel of pre-CGT shares in Company X (acquired pre 20 September 1985), and a parcel of post-CGT shares in Company Y (acquired after 20 September 1985). Lisa passes away suddenly, and her son, David, is trying to get her tax affairs in order. David struggles to find documents in regards to the cost base of the shares.
Upon Lisa’s death, her shares form part of her estate which will be passed on to David as the beneficiary. David does not know when the shares were purchased or how much was paid. The pre-CGT shares will generally be deemed to have been acquired by David at the market value on the day Lisa died. If David sells these shares subsequently, his capital gain will be calculated as the difference between the proceeds and the market value. However, David will inherit the post-CGT shares at the cost base applicable to Lisa and will pay higher capital gains tax when he sells these shares. The pre-CGT shares may be treated as post-CGT assets due to lack of purchase substantiation. This means that unnecessary CGT will be paid by David on disposal.
Poor documentation can also lead to making estimates about the cost base of your investment. Understating your investment’s cost base can result in excess CGT that could have been avoided with a little documenting along the way.
If you would like to reconcile and update your investment portfolio and save the extra pain and cost your family may experience at a difficult time, we will be happy to assist.
Written by Grace Shideh
Posted on June 5, 2020
The thought of the Australian Tax Office (ATO) sharing up to 50% of any gain you make on an investment decision is enough to strike fear into the hearts of most people. Given Australia’s love affair with property, it is little wonder that we are often asked about the impact of capital gains tax (CGT) on property. This month, we explore the most frequently asked questions.
In general, CGT applies to any change of ownership of a CGT asset, unless the asset was acquired before 20 September 1985 when the CGT rules first came into effect.
Most questions about CGT on property are based on the main residence exemption that exempts your home (your main residence) from any CGT exposure when you sell the property.
I jointly own an investment rental property with my elderly mother. Neither of us has ever lived in the property. We’ve recently updated our wills. The lawyer says that if Mum’s will gifts her half of the property to me then this ‘gift’ will not attract capital gains tax. Is this correct?
Kind of. Tax law tends to work on the basis that if looks like a duck and walks like a duck then it’s a duck, not whatever your legal document calls it. Exposure to capital gains tax is a matter of fact and substance.
If you inherit your mother’s share of the property, there would generally be no tax liability until you sell the property. What is important here is how the CGT is calculated when you ultimately sell.
When the rental property transfers to you from your mother’s estate, the tax rules determine how CGT is calculated when you eventually sell. Basically, if the property was bought on or after 20 September 1985 then when you sell the property your taxable profit will be based on the original purchase price. That is, you will end up being taxed on the increase in value of the property since it was acquired, including the portion that accrued while your mother was still alive.
In general, if you jointly own an investment property, your individual exposure to CGT will depend on how the property is owned. If the property is held as tenants in common then any CGT exposure is in line with your ownership interest. For example, in your case, it is 50% owned by your mother and 50% by you but different people can own different ownership interests. If the property is owned as joint tenants then any CGT exposure is equally shared by the owners.
I bought a house in 2000, and lived in it until 2003. I was posted overseas with my job between 2003 and 2011. During that time my brother lived in the house rent free – he just paid for utilities. In 2011 to 2012, I rented the house out (no one I knew). I moved back into the property in 2012 and have just sold the house. Do I have to pay capital gains tax on the property?
The capital gains tax rules are more understanding about how people live their lives than other laws and in some circumstances allow you to continue to treat your home as your main residence even if you are not actually living in it.
While you are away overseas, if you leave the property vacant or let a friend or relative live in the property rent-free, assuming you do not claim any other property as your main residence, then you can continue to treat the property as your main residence for CGT purposes indefinitely.
If you rent the property out while you are away, the tax laws allow you to still claim the property as your main residence as long as the period you rent it for is not more than a total of 6 years. This 6 year period can actually be reset by moving back into the property again.
Effectively, you can move out and move back in as many times as you like and still claim the property as your main residence as long as it is your only main residence during that time and if you are renting it out, you do not rent it out for more than a total of 6 years across the period you are claiming the property as your main residence.
During the rental period you can also claim deductions against the rent, even though the property might still be exempt from CGT during this period.
I bought a property in 2008 and expected to move in straight away, but there were tenants still in the property and their lease still had 8 months to go. I waited for the lease to expire and then moved in. I have lived there ever since and plan to sell later this year. Can you just confirm that I would still qualify for a full CGT exemption on the sale as the property has significantly increased in value?
This is a very common situation but is probably overlooked much of the time. Unfortunately, you would not qualify for a full exemption in this case.
The main residence rules allow you to treat a property as if it has been your main residence since settlement date as long as you actually move into the property as soon as practicable after settlement. This is intended to cover situations where there is some delay in moving into the property due to illness or some other “reasonable cause”. The ATO’s view is that this rule cannot apply if you are waiting for existing tenants to vacate the property.
This means that you would only qualify for a partial exemption under the main residence rules. We will need to calculate your gross capital gain and then apportion it to reflect the period of time when it was actually your main residence (i.e., from when you actually moved in).
As long as you are a resident of Australia and have owned the property for more than 12 months we can also apply the 50% CGT discount to reduce the leftover capital gain.
It will be important in this case to gather as much evidence as possible of non-deductible costs that you have paid in relation to the property such as stamp duty, legal fees, commission paid to real estate agents, interest, rates, insurance, etc. This will help to reduce the gross capital gain that is subject to tax.
Tags: CGT (Capital Gains Tax)
Posted on June 5, 2020
Are you a long-term Australian expatriate holding properties in Australia?
You will have an unwelcome surprise when you return to Australia if you sell the relevant property after resuming Australian residency.
Many long-term Australian expatriates are unaware of the new capital gain tax rules applicable to non-residents holding assets that are classified as taxable Australian property (TAP).
These rules came into effect on 8th May 2012 to remove the 50% CGT discount for foreign and temporary residents.
taxable Australian real property;
indirect Australian real property interest;
an asset used in carrying on a business through permanent establishment in Australia;
options and rights to acquire the assets listed above; and
a CGT asset covered by a CGT event that arises where a person ceases being a resident and elects to defer their CGT liability.
Australian expats returning to Australia will be partly denied the CGT discount even if they sell the relevant property after resuming Australian residency.
The discount percentage calculation is based on the acquisition date of the CGT asset and the residency status of the individual.
The CGT discount is adjusted down to reflect the proportion of the discount testing period that the individual was an Australian resident.
If the property was acquired on or before 8th May 2012 and the individual was a non-resident, the calculation of the discount reduction will depend on whether market value choice is made at the time of leaving the country and how the property market performed until the property was sold or the expatriate returned back to Australia.
If no market value choice was made, the discount is apportioned for the number of days of Australian tax residency after 8th May 2012.
In many cases the effect of not choosing the market value method is that the CGT discount may not be available for gains accrued prior to 8 May 2012.
It is important therefore to start planning now for your return and consider obtaining market valuations of any TAP you own to ensure you can maximise the CGT discount on future discount capital gains, even if you don’t expect to return to Australia for some time.
If you consider living abroad, you should also be aware of the impact of the new measures as they may affect your decision to cease being an Australian resident.
Proper tax planning will reduce your exposure to tax!
At HCG we always address cross-border tax issues with our clients, help them document and support their residency status and put strategies on place to reduce the tax outcome.
If you have any questions, we are just a phone call away.