Tax Q&A Your questions on Inheritance Tax answered

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14/01/2015

Capital gains tax on inherited property 

Q: I inherited (along with my siblings) my mother's property in March 2014, and want to know if the sale of the property would be fully CGT-free. The property was purchased post-CGT. It was used as the main residence for the whole time and earned no income. It’s currently used as my sister’s main residence; she has the right of occupancy under the will. However, the property is 65ha - so would we be entitled to a CGT exemption on the whole property or only on 2ha (including dwelling)? Is this also the case if the property is sold within two years from probate?

A: The main residence capital gains tax exemption generally applies for a maximum land size (including dwelling) of up to 2ha (provided the land and dwelling have not been used for income-producing purposes), and this also applies to property that has been inherited. 

That is, if the property is sold within two years from probate, then only 2ha will be free of capital gains tax while the other 63ha will be subject to capital gains tax. 

You can select any 2ha which will give you the best tax outcome. Nonetheless, the remaining 63ha will be subject to capital gains tax.

If the property is sold more than two years after probate, then capital gains tax will apply to the full 65ha of the property.

As the property was purchased after 20 September 1985, you will also inherit from your late mother the cost base and date of when the actual property was initially purchased by her.

– Angelo Panagopoulos 

Inheritance tax 

Q: As a beneficiary I am about to inherit, along with my sibling, a property in Victoria which has had a recent appraisal of $300k. We wish to sell the property and would like to know the tax consequences of this sale. My mother passed away in 1993, leaving funds to her de facto to purchase a property under a life interest arrangement. He purchased an apartment for $109k in 1994 and rented it out until his passing in July 2014 (12 months ago).

The property has been in held in trust by the executors and the title is currently in their names.

I am currently a non-resident and have been since 1999. My question is, what are the CGT consequences if:
a) the property is sold directly through the estate before the end of 2015? b) the property title is transferred to the beneficiaries, who sell immediately, before the end of 2015?

A: More information is required about the property that you are about to inherit because, on the one hand, your late mother’s de facto partner purchased the property in 1994 under a life interest arrangement and, on the other hand, the apartment was rented out for approximately 20 years until his passing.

With the limited information to hand, I will make the assumption that your late mother’s late de facto partner used the property under a life interest arrangement and simultaneously used part of the same property for income-producing purposes.

If you and your sibling inherit the property and keep/hold on to the property, there will be no capital gains tax implications. However, if you and your sibling sell the property after you inherit it, you will most likely be subject to capital gains tax on a portion of the $191,000 increase in value since the property was initially acquired in 1994 (being the current market value of $300,000 less the purchase price of $109,000 in 1994), as the cost base is also inherited by you and your sibling. 

The question then becomes, what portion of the full capital gain of $191,000 is assessable and subject to capital gains tax. 
It would be difficult to determine this without further specific details. However, it is more than likely that some of that profit will be subject to capital gains tax.

On the other hand, if the estate sells the property, then the estate will have to pay the capital gains tax liability, and any net proceeds remaining afterwards will be passed on to you and your sibling. There will be no capital gains tax consequences for you and your sibling personally if you inherit money/cash.

– Angelo Panagopoulos

Tax issues when changing home loan ownership 

Q: We bought an NRAS land and house package investment property in Brisbane, and it has been tenanted for the last year. The property is in both my and my wife's names (50% each) and the mortgage on the property is also equally divided between us. 

We are 55 and 52 years of age. For medical reasons my wife had to quit her full-time job and start a part-time job. Because she is paying no tax, she won't get back any tax benefits for her expenses on this property. The property cost is $350,000 and the loan is also $350,000. 

To use the tax benefits, I want to transfer this entire home loan to my name through the bank and leave the property in both names. Can I do this? If yes, what about the CGT?  In future, if we sell the property do we both pay CGT or do I pay the full CGT?

A: The Tax Office has specific legislation per Part 4A of the Tax Act which stipulates that anything done purely for tax-driven outcomes is not allowed. In other words, if the dominant purpose for wishing to transfer all of the home loan to your name is purely for a tax benefit (to claim the full interest expense on the loan as an income tax deduction while only being entitled to 50% of the income from the property), then this would be a breach of Part 4A and therefore not allowed. 

Having said that, provided you don’t breach Part 4A, the only way you may be able to transfer the entire loan to your name and be able to claim all of the interest expense on the loan as an income tax deduction is if you also transfer your wife’s share of the property fully to your own name. This, however, will be a capital gains tax event, which may give rise to a CGT liability upon transfer. Again, be mindful of the Part 4A provisions of the Tax Act if you are considering this strategy.

In the future, if you sell the property as it stands currently, you and your wife will be subject to CGT as you both own the property 50% each. On the other hand, if you were to transfer your wife’s share to your name and then sell the property in the future, firstly your wife may incur a CGT liability when she transfers her share to you, and subsequently you will then also incur a CGT liability when you sell the property for a capital gain at a later date. 

– Angelo Panagopoulos

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