Question 1: Hi Craig, thank you for your informative pieces. My question has to do with taxation of proceeds from the estate of a deceased person.
Australia is supposed to have no death or inheritance taxes, yet I understand that, apart from a rather restrictive definition of dependents, proceeds from an estate are regarded as taxable income in the hands of the recipient.
I also believe that the tax treatment of superannuation funds held in the estate (including associated death/TPD insurance benefits) is different. I wonder whether you could please clarify this?
If it’s the case, it would seem sensible to give away the money before one dies (if possible).
You are correct in saying Australia has no death or inheritance tax – these were abolished by the state and federal governments in the late 1970s.
Some economists have called to bring them back, arguing that they would help pay for our budget shortfall and debt and help improve fairness. But the two largest political parties have indicated they do not support this.
It’s worth noting that many other countries do have some form of inheritance taxes, but they tend to only apply at very high asset thresholds.
In Australia, when someone passes away, a final tax return is required for the deceased person, with tax paid at normal rates.
The deceased estate may receive income after the date of death.
A trust tax return will need to be lodged for the deceased estate where tax has been withheld or where there is a tax liability on the income received.
Although we don’t have an inheritance tax, we do have some forms of quasi-death taxes.
The most common example being taxation on superannuation death benefits that are paid to non-dependents.
For tax purposes, a ‘dependant’ includes:
- The deceased person’s spouse or former spouse
- The deceased person’s child, aged less than 18
- Any other person with whom the deceased person had an interdependent relationship just before he or she died
- Any other person who was a dependant of the deceased person just before he or she died
- An individual who receives a superannuation lump sum because of the death of another person, if the deceased was a protective service officer or died in the line of duty as a member of the defence force, the Australian Federal Police, or state or territory police force.
If your super death benefit is paid to any of the above, then no tax is payable.
If it is paid to another party, such as adult children who are not financially dependent on you, then the tax is payable at 17 per cent (including Medicare) on the ‘taxed element’, and up to 32 per cent on the ‘untaxed element’.
There is no tax payable on the ‘tax-free’ component, regardless of whom it is paid to.
This is why many people hoping to reduce future tax liabilities for their beneficiaries look to undertake a cash-out and recontribution strategy.
This is done by ‘cashing’ out some existing super, and recontributing it as an after-tax non-concessional contribution, as these contributions all go to the ‘tax-free’ component.
I have previously detailed how this strategy works, but it is complex so I would recommend seeking advice from a licensed professional before proceeding.
And, as you have stated, you can always just cash out funds prior to your death and give away the funds to avoid the tax.
But this is risky, as a reasonable number of people die unexpectedly, and, even if they don’t, they may have other things on their mind at the time, besides how much tax their beneficiaries may pay.
Question 2: If we have a capital loss from the sale of our investment homes, why can we not claim that loss from our annual income tax? If that is not possible, how can we reclaim that loss and how long can we carry forward this loss?
Question 3: Can you offset the capital gain from the sale of an investment property against the capital loss from the sale of shares?
I will answer these two questions regarding a capital loss together.
A capital loss can only be offset against a capital gain, but it can be carried forward indefinitely – i.e. if you make a capital loss on the sale of an investment and don’t have a capital gain in the same financial year, you can keep it up your sleeve and use it in another financial year if you make a capital gain on the sale of an investment.
As an example, if you sold some shares and made a loss of $10,000, you cannot claim that loss against other income, i.e. salary or wages income.
However, if in, say, five years, you sell an investment property and make a capital gain of $100,000, you can offset the $10,000 loss against this.
This gives you a capital gain of $90,000, and if the property was held for more than 12 months, this can be discounted by 50 per cent, giving you a net gain of $45,000 to be included in your tax return.
The only limit to how long you can carry forward a capital loss is when you die.
If the deceased person has accumulated losses at the date of death, they can be offset against income in the date of death tax return (capital losses may be offset against capital gains).
But they can’t be carried forward into the deceased estate.
Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services
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