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Issue 147, 13 April 2007
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Articles in this edition include:
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LRA.Service@thomson.com Copyright:
Thomson Legal & Regulatory Limited
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Pyrmont NSW 2009
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Inheriting tax problems
When a person dies, not only do their assets pass to their
beneficiaries but unexpected tax liabilities may also be inherited
by their beneficiaries. These tax liabilities may arise from the
subsequent sale of capital assets without the benefit of offsetting
capital losses that expire upon the person’s death. Alternatively,
a tax liability may arise due to the need for the person to ‘put
their affairs in order’ before their death. Consequently,
effective estate planning is required to prevent loved ones
inheriting tax liabilities upon the death of a wealthy individual.
Losing losses
Tax losses may be carried forward indefinitely during a
person’s lifetime. But revenue and capital losses incurred,
accumulated and carried forward by the deceased expire, extinguish
and cease upon a person’s death. Consequently, the taxpayer’s
estate may incur substantial tax liabilities on post-death income
from assets or from the disposal of the assets. These taxable
profits are not reduced by any pre-death losses of the taxpayer.
Inherited taxes
Most people tend to accrue or hold onto appreciating assets
and sell those assets that have fallen in value. This applies
particularly to people who have invested in the share market.
Unfortunately, strategies like this could create tax problems for
the heirs of the estate. How? When a person dies, the post-CGT
assets of the deceased pass to the executors at their cost base at
the time of death. Any capital gain made on the disposal of those
shares by the executor is a capital gain in the hands of the estate.
Where the deceased has during their lifetime ‘cleaned out’ the
unsuccessful share investments, no capital losses are available to
be offset against the capital gains made by the estate.
So the tax
disadvantage is not borne by the deceased during their lifetime.
Instead, the disadvantage of the gifts made by the deceased falls on
the heirs and beneficiaries.
Keeping losses alive
The above examples underline the need for estate planning.
Where an individual is accumulating substantial capital losses, it
is probably not prudent to allow those capital losses to run on
indefinitely. Positive steps should be taken to realise assets, even
if by way of wash sales (i.e. transfer from the individual to an
associate) and thereby recoup the losses as well as update the cost
base of the asset for CGT purposes. Clearly, but regrettably, the
older the person, the more important this issue becomes.
Use your trust
The capital gains need not be realised by the individual
but could instead be realised by a trust of which the individual is
a beneficiary. For example, where the individual has capital losses,
and the trust has capital gains, there is a positive advantage in
realising those capital gains. The capital gains may be passed by
the trust through to the individual taxpayer and thereby extinguish
any tax liability associated with those capital gains. If the funds
from the asset sales are reinvested through the trust the new assets
will have a newer and higher cost base. If there are any subsequent
capital losses, caused by a fall in value of those assets, at least
the capital losses are in an entity having a longer life than any
particular individual. There is more probability that the losses may
be recouped in the trust than in the hands of the individual.
A planning opportunity
Unfortunately, many solicitors happily engage in drafting
wills without much appreciation of the taxation issues raised above.
A greater degree of planning and consideration of the taxation
position is required for wealthy individuals than is commonly
appreciated. Whilst the contemplation of one’s death is one of the
less cheerful parts of life, nonetheless taxation and death remain
evermore entwined as the two certainties.
This article appeared in Thomson’s InTax
(April 2007); Australia’s best independent monthly tax magazine.
It provides concise reports of the latest tax news, plus the
practical implications of tax developments in an easy-to-read
magazine format. To find out more, phone Thomson Customer Service on
1300 304 197 or click
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ASIC launches new simpler super
calculator
ASIC has launched a new superannuation calculator to help
consumers saving for retirement. ASIC’s Executive Director,
Consumer Protection, Mr Greg Tanzer said the calculator
incorporates the new rules about super contributions that take
effect from 1 July 2007. The calculator, together with a
comprehensive User Guide, is available from ASIC on its consumer
website FIDO. ASIC notes that, until 1 July 2007, FIDO
will also maintain its previous super calculator to assist people
making contributions before that date.
This
article appeared in ATP’s daily Latest
Tax News (Thursday, 5 April). With tax fast-moving and ever
changing — EVERY DAY, practitioners rely on Thomson ATP’s
daily Latest Tax News for quick, accurate, comprehensive
information — no compromises. When you need to know what’s new
in tax and related news every day, there’s only one place to
look — LTN. To find out more, click
here.
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Alignment of small business tax
concessions
The Federal Government
recently released the Exposure Draft Tax Laws Amendment (Small
Business) Bill 2007, which standardises the eligibility criteria
for small business tax concessions from 1 July 2007. This is in
accordance with the Treasurer’s press release in late 2006,
which can be accessed here.
The proposal is that small businesses will
only have to apply one eligibility test to access a range of small
business tax concessions, the test being that any businesses with
an annual turnover of less than $2 million will be able to
access any of the GST, STS, CGT, FBT and PAYG small business
concessions.
This summary article appears in the May 2007
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