Rules that apply if you're a deceased person’s legal personal representative or a beneficiary of a deceased estate.
CGT and deceased estates
When a person dies, the assets that make up their estate can:
- pass directly to a beneficiary (or beneficiaries), or
- pass directly to their legal personal representative (for example, their executor) who may dispose of the assets or pass them to the beneficiary (or beneficiaries).
A beneficiary is a person entitled to assets of a deceased estate. They can be named as a beneficiary in a will or they can be entitled to the assets as a result of the laws of intestacy (when a person dies without having made a will).
A legal personal representative can be either:
- the executor of a deceased estate (that is, a person appointed to wind up the estate in accordance with the will), or
- an administrator appointed to wind up the estate if the person does not leave a will.
Capital gain or capital loss on death is disregarded
There is a general rule that CGT applies to any change of ownership of a CGT asset, unless the asset was acquired before 20 September 1985 (pre-CGT).
There is a special rule that allows any capital gain or capital loss made on a post-CGT asset to be disregarded. It will be disregarded if, when a person dies, an asset they owned passes:
- to their legal personal representative or to a beneficiary, or
- from their legal personal representative to a beneficiary.
Exceptions to this rule
A capital gain or capital loss is not disregarded if a post-CGT asset owned at the time of death passes from the deceased to a tax-advantaged entity or to a foreign resident. In these cases, a CGT event is taken to have happened to the asset just before the person died. The CGT event results in:
- a capital gain if the market value of the asset on the day the person died was more than the cost base of the asset, or
- a capital loss if the market value was less than the asset’s reduced cost base.
These capital gains and losses should be taken into account in the deceased person’s ‘date of death tax return’. The date of death tax return is for the period from the start of the income year to the date of the person’s death.
However, any capital gain or capital loss from a testamentary gift of property can be disregarded if:
- the gift was made to a deductible gift recipient
- the gift would have been income tax deductible if it had not been a testamentary gift.
The condition that testamentary gifts of property must be valued at greater than $5,000 before the CGT exemption applies does not apply to gifts made on or after 1 July 2005.
Tax-advantaged entity
A tax-advantaged entity is:
- a tax-exempt entity, for example, a church or charity, or
- the trustee of
- a complying superannuation fund
- a complying approved deposit fund, or
- a pooled superannuation trust, or
- a foreign resident .
Foreign resident beneficiary
If a foreign resident is a beneficiary of a deceased’s post CGT asset, any capital gain or capital loss is taken into account in preparing the deceased person’s date of death tax return if:
- the deceased was an Australian resident when they died
- the asset is not taxable Australian property in the hands of the beneficiary.
Assets which pass to the beneficiary or legal personal representative
Main residence
Special rules apply if the asset was the deceased person’s or beneficiary’s main residence, see Inherited main residence and Flowchart 3.6.
Other real estate
Even if the property was not the deceased person’s main residence, special rules may mean you qualify for a full or partial exemption when you dispose of it, see Inherited main residence and Flowchart 3.6.
Other assets
In administering and winding up a deceased estate, a legal personal representative may need to dispose of some or all of the assets of the estate. Assets disposed of in this way are subject to the normal rules and any capital gain the legal personal representative makes on the disposal is subject to CGT.
Similarly, it may be necessary for the legal personal representative to acquire an asset (for example, to satisfy a specific legacy made). Any capital gain or capital loss they make on disposal of that asset to the beneficiary is subject to the normal CGT rules.
If a beneficiary sells an asset they have inherited, the normal CGT rules also apply.
Acquisition of asset
If you acquire an asset owned by a deceased person as their legal personal representative or beneficiary, you are taken to have acquired the asset on the day the person died. If that was before 20 September 1985, you disregard any capital gain or capital loss you make from the asset.
Cost base of asset
- Assets acquired by the deceased person before 20 September 1985
If the deceased person acquired their asset before 20 September 1985, the first element of your cost base and reduced cost base (that is, the amount taken to have been paid for the asset) is the market value of the asset on the day the person died.
If, before they died, a person made a major improvement to a pre-CGT asset on or after 20 September 1985, the improvement is not treated as a separate asset by the legal personal representative or beneficiary. They are taken to have acquired a single asset. The cost base of this asset, when the legal personal representative or beneficiary acquires it, is equal to the cost base of the major improvement on the day the person died plus the market value of the pre-CGT asset (excluding the improvement) on the day the person died.
- Assets acquired by the deceased person on or after 20 September 1985
If a deceased person acquired their asset on or after 20 September 1985, the first element of your cost base and reduced cost base is taken to be the deceased person’s cost base and reduced cost base of the asset on the day the person died.
There is an exception if the asset is a dwelling and certain conditions are met. See Cost to you of acquiring the dwelling.
If the deceased person died before 21 September 1999, and you choose the indexation method to work out the capital gain when you dispose of the asset (or when another CGT event happens), you index the first element of the cost base from the date the deceased person acquired it up until 21 September 1999.
If the deceased person died on or after 21 September 1999, you cannot use the indexation method and, when you dispose of the asset, you must recalculate the first element of your cost base to leave out any indexation that was included in the deceased’s cost base.
If you are the trustee of a Special Disability Trust, the first element of your cost base and reduced cost base is the market value of the asset on the day the person died.
Expenditure incurred by a legal personal representative
As a beneficiary, you can include in your cost base (and reduced cost base) any expenditure the legal personal representative (for example, the executor) would have been able to include in their cost base if they had sold the asset instead of distributing it to you. You can include the expenditure on the date they incurred it.
For example, if an executor incurs costs in confirming the validity of the deceased’s will, these costs form part of the cost base of the estate’s assets.
Example 105: Transfer of an asset from the executor to a beneficiary
Maria died on 13 October 2000, leaving 2 assets, both acquired after 19 September 1985: a parcel of 2,000 shares in Bounderby Ltd and a vacant block of land. Giovanni was appointed executor of the estate (the legal personal representative).
When the assets are transferred to Giovanni as legal personal representative, he disregards any capital gain or capital loss. Giovanni disposes of (sells) the shares to pay Maria’s outstanding debts. As the shares are not transferred to a beneficiary, any capital gain or capital loss on this disposal must be included on the tax return for Maria’s deceased estate.
When all debts and tax have been paid, Giovanni transfers the land to Maria’s beneficiary, Antonio, and pays the conveyancing fee of $5,000. As the land is transferred to a beneficiary, any capital gain or capital loss to date is disregarded. The first element of Antonio’s cost base is taken as Maria’s cost base on the date of her death. Antonio is also entitled to include in his cost base the $5,000 Giovanni spent on the conveyancing.
End of exampleChoosing the indexation method or the discount method
If the deceased person died before 11:45 am AEST on 21 September 1999 and you dispose of the asset (as legal personal representative or beneficiary) after that date, there are 2 ways of calculating your capital gain. You can use either the indexation method or the discount method, whichever gives you the better result. However, the CGT discount is only available if you are an individual, a trust or a complying superannuation entity.
Elements of an asset’s cost base can be indexed only if you own the asset for at least 12 months before disposing of it. For the purposes of this 12-month ownership test you are taken to have acquired the asset when the deceased acquired it, not from the date of their death.
For the CGT discount to apply, you must have acquired the asset at least 12 months before disposing of it. For the purposes of this 12-month ownership test, you are taken to have acquired the asset at one of the following times:
- for pre-CGT assets, the date the deceased died
- for post-CGT assets, the date the deceased acquired it.
Example 106: Indexation and CGT discount
Leonard acquired a property on 14 November 1998 for $126,000. He died on 6 August 1999 and left the property to Gladys. She sold the property on 6 July 2022 for $240,000. The property was not the main residence of either Leonard or Gladys.
Although Gladys acquired the property on 6 August 1999, for the purpose of determining whether she had owned the property for at least 12 months, she was taken to have acquired it on 14 November 1998 (the day Leonard acquired it).
At the time of disposal, Gladys had owned the property for more than 12 months. As she is taken to have acquired it before 11:45 am AEST on 21 September 1999 and disposed of it after that date, Gladys could choose to index the cost base. However, if the discount method would give her a better result, she could choose to claim the CGT discount.
If Gladys chooses the discount method she would have to exclude from the first element of her cost base the amount that represented the indexation that had accrued to Leonard up until the time he died.
End of exampleIf you are a foreign or temporary resident and taxable Australian property passes to you from the deceased, you may not be able to apply the CGT discount if you are taken to have acquired the asset after 8 May 2012.
For more information, see CGT discount for foreign residents.
Collectables and personal use assets
A post-CGT collectable or personal use asset is still treated as such when you receive it as a beneficiary or the legal personal representative of the estate.
Joint tenants
If 2 or more people acquire a property asset together, it can be either as tenants in common or as joint tenants.
If a tenant in common dies, their interest in the property is an asset of their deceased estate. This means it can be transferred only to a beneficiary of the estate or be sold (or otherwise dealt with) by the legal personal representative of the estate.
If one of the joint tenants dies, their interest in the property passes to the surviving joint tenants. It is not an asset of the deceased estate.
For CGT purposes, if you are a joint tenant you are treated as if you are a tenant in common owning equal shares in the asset. However, if you are a joint tenant and another joint tenant dies, on that date their interest in the asset is taken to pass in equal shares to you and any other surviving joint tenants, as if their interest is an asset of their deceased estate and you are beneficiaries.
This means that if the dwelling was the deceased’s main residence, you may be entitled to the main residence exemption (see Inherited main residence) for the interest you acquired from them.
If the joint tenant who dies acquired their interest in the asset on or after 20 September 1985, the first element of the cost base of the interest you acquire from them is the cost base of their interest on the day they died, divided by the number of joint tenants (including you) who acquire it. The first element of the reduced cost base of the interest you acquire from them is worked out similarly.
Example 107: Surviving joint tenants
In 1999, Ming and Lee buy a residential property for $250,000 as joint tenants. Each one is taken to have a 50% interest in it. On 1 May 2001, Lee dies.
On 1 May 2001, Ming is taken to have acquired Lee’s interest for an amount equal to Lee’s cost base on that day.
If Ming uses the property as his main residence after Lee dies, he may be entitled to the main residence exemption (see Real estate and main residence) for the interest he acquired from Lee as well as for his original interest.
End of exampleIf the joint tenant who dies acquired their interest in the asset before 20 September 1985, the first element of the cost base of the interest you acquire from them is the market value of their interest on the day they died, divided by the number of joint tenants (including you) who acquire it. The first element of the reduced cost base of the interest you acquire from them is worked out similarly.
For the indexation and discount methods to apply, you must have owned the asset (or your share of it) for at least 12 months. As a surviving joint tenant, for the purposes of this 12-month test, you are taken to have acquired the deceased’s interest in the asset (or your share of it) at the time the deceased person acquired it.
Example 108: CGT and joint tenants
Trevor and Kylie acquired land as joint tenants before 20 September 1985. Trevor died in October 2011. For CGT purposes, Kylie is taken to have acquired Trevor’s interest in the land at its market value at the date of his death.
Kylie holds her original 50% interest as a pre-CGT asset, and the inherited 50% interest as a post-CGT asset which she is taken to have acquired at its market value at the date of Trevor’s death.
If Kylie sold the land within 12 months of Trevor’s death, she would qualify for the CGT discount on any capital gain she makes on her post-CGT interest. She qualifies for the CGT discount because, for the purposes of the 12-month ownership test, she is taken to have acquired Trevor’s interest at the time he acquired it, which was before 20 September 1985.
End of exampleUnapplied net capital losses
If the deceased had any unapplied net capital losses when they died, these cannot be passed on to you as the beneficiary or legal personal representative for you to offset against any net capital gains.
Life and remainder interests
There may be CGT consequences on the creation, surrender, expiry or disposal of a life interest or remainder interest.
For more information, see TR 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests.
Trustee choice to be assessed on capital gains
The trustee of a resident trust may choose (if permitted by the trust deed) to be assessed on a capital gain of the trust. This is allowed provided no beneficiary has received any amount referable to the gain during 2022–23 or within 2 months of the end of 2022-23 income year. The choice must be made in respect of the whole capital gain.
This is similar to (and replaced) the choice available to the trustee of a testamentary trust under the law prior to the 2010–11 amendments but is not limited to those trustees. Under the previous law (that applied from 2005–06) the trustee of a resident testamentary trust could choose to be assessed on the capital gains for an income year which would otherwise be assessed to an income beneficiary (or the trustee on their behalf).
The trustee will be able to make the choice if, for example, under the terms of the trust the income beneficiary cannot benefit from the capital gains. Only the trustee can make this choice.
If the trustee makes a choice in respect of a capital gain then:
- the trustee will be assessed on the capital gain under section 99 or 99A, as appropriate
- the capital gain is not taken into account in working out any beneficiary's net capital gain for 2022–23.
Example 109: Trustee choice to be assessed
Marcia is entitled to all the income of a resident trust for the duration of her life. Under the terms of the trust deed, the trust would be wound up on her death and the corpus distributed to Trevor.
While Marcia is alive, the trustee disposes of some shares in the trust and makes a capital gain. Marcia is not entitled under the terms of the trust to receive the proceeds from the disposal of the shares as Trevor is the capital beneficiary.
As the capital gain is included in the net income of the trust for tax purposes, Marcia may be assessed on her share of the capital gain even though she is not entitled to benefit from the gain. The trustee can make a choice to be assessed on the share of the capital gain that would otherwise be assessed to Marcia.
End of exampleContinue to: Earnout arrangements