Securing your legacy – a practical guide to tax and estate planning

Capital gains tax

Capital gains tax (CGT) is the tax paid on the earnings from selling an asset. CGT is not triggered by death but may apply when your assets are sold or transferred. The interplay between death and CGT is important to understand as it can result in tax becoming payable on assets that would normally not be subject to CGT, including your main residence.

For your main residence, exemption from CGT revolves around a few key conditions linked to the property’s use, ownership dates, and the residency status of both the inheritor and deceased.⁴

In summary, a property is eligible for the main residence exemption to CGT if it was the deceased’s main residence and it was not used to produce income, both the deceased and the beneficiary are Australian residents, and the property is sold within two years of death. It can stay exempt if it becomes the main residence of the deceased’s spouse, a beneficiary or someone who has a right to live there under the deceased’s will.

Properties bought before the CGT regime started on 20 September 1985 are also exempt.

Transfer duties

Although transfers due to death typically qualify for duty concessions, poor estate planning can result in significant duties being payable. This is particularly the case when asset ownership requires restructuring after your death or when beneficiaries or the estate need to sell property to settle the estate. Probate, the legal process of validating a will and administering the estate, can also impact transfer duties, although carefully structured asset ownership (see below) can help reduce tax consequences.

Better planning can reduce tax

Proper planning can significantly reduce or even eliminate the financial burden of taxes that arise upon death.

Consider a testamentary trust

Testamentary trusts are created by your will and activated upon your death to manage your assets for the benefit of your beneficiaries.

Income distributed to minor beneficiaries from testamentary trusts is taxed at standard adult rates rather than the punitive rates typically applied to children’s unearned income. For adults, income can be distributed to take advantage of lower tax brackets among the beneficiaries, minimising the overall tax burden.

Assets held in a trust are generally not considered personal assets of the beneficiaries, which means they are often shielded from legal claims against individual beneficiaries.

Review asset ownership

Properly structured asset ownership can help reduce tax consequences. For example, joint tenancy – a form of property ownership where people have an equal share in an asset – allows property to pass directly to the surviving owner without being part of the estate, potentially avoiding transfer duties and CGT.⁵  Withdrawing money from superannuation can mean that it forms part of your estate when you die and does not get treated as taxable super death benefit.

Gifting and lending money

In Australia, gifts are generally not considered income and do not attract income tax.⁶  But gifting can affect your eligibility for the Age Pension and may come with other tax implications like capital gains tax or stamp duty.

Taxation implications of gifting

Capital gains tax: if you give away an asset that is subject to CGT, such as shares or property, you are deemed to have disposed of it at its market value which can result in a CGT bill.

Transfer duty: if you transfer property as a gift, duty may be payable based on the market value of the property.⁷

Lending money

Loans can be a powerful way to assist family members, but it can be worthwhile documenting your agreement to protect your rights and avoid disputes. Documentation can include details such as the amount, the interest rate, the repayment schedule, and the consequences of default. Proper documentation clarifies the terms of the loan and can ensure the loan is treated as an asset of the estate, which helps ensure the loan is repaid and properly distributed according to your wishes.

Pensions, social security, and gifting

If you are the recipient of government benefits, there are strict rules about giving away and lending money. Generally, if you or your partner gift money, income, or assets, government agencies will assess the gift in income and assets tests.⁸

To be sure, you can give away as much as you like – just be aware that there may be implications for your government payments if the total value of your gifts is more than the value of the ‘gifting free area’⁹, which allows you to gift up to $10,000 per financial year, or up to $30,000 over five financial years, before counting towards assets and income tests.

Do you have enough?

One important and sometimes overlooked part of gifting or lending to family is the consideration of whether you can do without the money. Sometimes, loans are not repaid, and this can have consequences on your standard of living if you were relying on the money.

So, before you seek to help your family, take a careful look at your own needs and be conservative about assumptions for potential investment returns and future spending requirements.

Intergenerational wealth

Some $3.5 trillion in assets are expected to change hands over the next two decades, meaning planning how this wealth is transferred is more important than ever.

Some are concerned about how these transfers might affect social dynamics and economic disparities, but recent research from the Productivity Commission shows that, contrary to common perceptions, wealth transfers generally help reduce inequality.¹¹

However, it is important to ensure your heirs are prepared to handle their inheritances responsibly.

Here are some things you can do: