The new federal government has undertaken a wide review of many tax changes previously proposed by Labor and has confirmed that it will be proceeding with some but not others.
Not Proceeding
In the context of deceased estates, they will NOT be proceeding with some proposed changes including:
- confirming that there is no CGT event when an asset passes from the trustee of a testamentary trust to a beneficiary.
- changes to the timing of CGT event K3 (relevant to non-resident and charitable beneficiaries).
- changes to the joint tenancy rules and CGT event K3.
These proposals were announced by Labor in the 2011/12 and 2012/13 budgets but not legislated.
As the changes are not proceeding, we are left in the position prior to the announcements, which we summarise below.
Testamentary Trust Trustee to Beneficiary & CGT
Under a practice statement (PSLA 2003/12), the position of the ATO was that it would treat trustees of testamentary trusts like executors of estates for the purpose of CGT. This means that for assets forming part of the original estate of the deceased, there would be CGT rollover under Div 128 Income Tax Assessment Act 1997. The announcement was to legislate this position but it is now not proceeding. The big question is will the ATO still apply PSLA 2003/12?
As at the date of this newsletter, the ATO website was still referring to PSLA 2003/12 as applicable but it had not been updated since December 2013 (when the most recent announcement was made).
TIP – check whether the PSLA still stands before distributing from a testamentary trust, or when making a decision about the use of optional testamentary trusts.
TRAP – these concessions only apply to assets owned at date of death. Assets acquired by an executor after date of death do not qualify. This can be a big issue for life interests.
TRAP – Wills that force assets into a testamentary trust (without options available) could result in extra CGT on transfer of assets to individual beneficiaries.
Non – Residents and Charities – CGT event K3
CGT event K3 occurs when an asset passes to a concessionally taxed entity (like a charity or non-resident). This event operates to tax the deceased just before they died, in respect of certain assets passing to some charities and non-residents. In practice, the estate pays the tax but only losses of the deceased can be used against the gain (not losses of the estate).
The proposed changes included having the CGT event occur when the asset passed to the non-resident (ie – as part of the estate administration or the operation of a testamentary trust). Had it proceeded, it would have meant that any gain triggered as a result of the transfer to a non-resident from the estate or from the testamentary trust would be able to have been offset by losses incurred post death.
This review does not appear to be proceeding so K3 operates as usual such that the deceased bears the tax (and may require amendment when the asset passes some years later).
TIP – This issue is only 1 of the tax issues relevant where you have non-resident beneficiaries. The removal or reduction of the 50% discount for non-residents has proceeded. Review Wills and seek advice as to strategies to minimise the impact of these changes.
Joint Tenants & CGT Event K3
The Labor government planned to close a “loophole” where an asset held as joint tenants with a non-resident was not caught by CGT Event K3 as it did not pass under an estate.
Again, this review does not appear to be proceeding.
How we can help
If you require further information, please do not hesitate to contact us.