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CGT and Non-Resident Beneficiaries

A "Virtual" Inheritance Tax: Capital Gains Tax (CGT) and Non-Resident Beneficiaries

Special Rules for Non-Residents

Technically, Australia doesn't have an inheritance tax, but if you are the non-resident beneficiary of an Australian estate, there are special capital gains tax rules which can have much the same effect as an inheritance tax, and need to be very carefully considered in any estate planning.

In general, if you are the beneficiary of an Australian estate you are taken to have acquired the asset on the day the person died. CGT is typically not payable at this time, but later when you dispose of the asset, unless an exemption applies.

However, special rules apply when a beneficiary is non-resident - in that case all assets that are not "taxable Australian property" that pass to a foreign resident through an Australian estate will be subject to CGT at that point in time and paid by the estate.

In effect, for the purposes of the estate, the deceased is deemed to have disposed of the assets that pass to a foreign resident at the date of their death. The value used to calculate the CGT payable is the market value of the assets as at the date of death and any applicable CGT must be recorded in the deceased’s "date of death" tax return and tax paid by the estate. Then, unless the will contains suitable provisions, the tax payable will be deducted from the available estate and in effect all beneficiaries may bear the cost.  Consider the example below.

A resident Australian father dies leaving an estate comprising cash of $300,000 and 10,000 BHP shares valued at $450,000 to four children in equal shares; with one of the child beneficiaries non-resident for Australian tax purposes. The shares had been purchased as a single lot in 1989 at a unit price of $10.20 (total cost: $102,000) and therefore a total capital gain exists at death of $348,000.

Because one of the four equal beneficiaries is a non-resident the father will be deemed to have sold 2,500 BHP shares at the the date of death and the estate will be liable for CGT on the capital gain on those shares.

This causes two immediate problems for the resident beneficiaries:

  • their share of the cash available for distribution will be reduced to pay the tax applicable on the non-resident beneficiaries shares; and
  • they remain liable to pay the CGT applicable on their shares when they are sold in the future.

Additionally, the estate's executors are personally liable to ensure that taxes are properly paid in relation to the estate. If they are not aware of the different rules attaching to non-residents they may have a legal liability to repay any foregone tax and additional penalties may apply.

Alternative Approaches

Strategies do exist to address and minimise these consequences. For example, depending on the mix of assets within the estate a testator can choose to bequeath non-CGT assets (such as cash) to non-resident beneficiaries and CGT assets to Australian-resident beneficiaries, or give executors within the terms of their will the flexibility to allocate shares in this fashion.

Alternatively, the will could provide for a Testamentary Trust to come into existence on the testator's death, for the benefit of any/all non-resident beneficiaries. However, the correct approach may also be dependent on the country in which the non-resident beneficiary resides - for example being the beneficiary of a "foreign trust" can give rise to a significant compliance burden for US residents - with the objective being to ensure that any tax is minimised across all the tax jurisdictions.

Professional advice is absolutely required in these circumstances and expatriates have a duty, even if it is an uncomfortable one, to ensure that testators and/or executors are aware of the CGT provisions and plan accordingly - including ensuring that the terms of a will are sufficiently flexible to be tax effective.

If you would like to arrange professional advice please complete the Inquiry form below providing details and you will be contacted promptly.

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