In this previous post, we produced a general overview of how deceased estates are managed. Let’s now take a closer look at how the beneficiaries of a will are affected by tax requirements.

How Beneficiaries Are Taxed

The first thing you need to know is what “presently entitled” means.

“Presently entitled” refers to when an individual has a claim or interest in the income of a deceased estate which cannot be defeated by another person. However, this does not guarantee that they will actually receive the income.

While an estate is being administered, beneficiaries are not presently entitled to the income. This is because the beneficiaries’ ‘right to the income’ may take a backseat to debtors of the deceased and anyone contesting the will.

Here are the guidelines for taxing beneficiaries:

– There is generally no tax implication when assets of the estate are distributed (i.e., real estate or other capital)

– When beneficiaries are presently entitled to the income of a deceased estate, they are personally liable to pay tax on it

– ‘Presently entitled’ income of a deceased estate is taxed based upon the year the present entitlement arose, not the year the amount is received

– Presently entitled income is taxed at the individual tax rate in the year it is assessed

– If a beneficiary is under a legal disability (such as being under 18 years of age) but is presently entitled to income, then the executor of the will should pay the tax on his or her behalf

Keep in mind that the tax implications are generally different for foreign residents and tax-advantaged entities. It’s best to consult a financial professional to understand which guidelines apply in your situation.

Capital Gains Tax on Deceased Estate Assets

Capital gains tax (CGT) is what you pay out upon disposing of an asset. If you acquired this asset from a deceased estate, then there are a couple of factors that determine how much you will pay.

Date of Acquisition

– The day deceased passed away is the day you are considered to have acquired the asset. If this happened before 20 September 1985 (pre-CGT), then you can disregard any capital gain or loss you make from the asset.

– Determining the date will help you determine the cost base of the asset

Calculating CGT on Assets Acquired from a Deceased Estate

There are three possible options for calculating CGT:

– Indexation Method

– Discount Method

– Other Method

If the Indexation Method is used for calculating the CGT, when applying the 12-month ownership test the acquisition date is the date the deceased acquired the asset, NOT the date of their death.

The deceased’s main residence may be CGT-exempt after you inherit it depending on when the deceased first acquired the property, when they passed away and whether the property was used to generate income.

The only sure way you can choose the right method for your situation is by consulting an expert. A professional accountant will help you determine whether or not CGT will affect your assets.

Give us a call at Nitschke Nancarrow on (08) 8379 9950 or send me an email.

– Kym Nitschke