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Capital gains is the preferred tax

July 25 | Noel Whittaker

People complain about taxes, but if you had to choose which tax to pay, your preference would have to be capital gains tax (CGT).

It is not triggered until you dispose of the asset, which may be many years from when you bought it, and provided you have owned it for over a year, you get a 50% discount.

Furthermore, even death does not trigger CGT – it merely transfers any CGT liability to the beneficiaries.

If the asset is disposed of they may be liable for CGT, but if the asset is kept for their lifetime, any CGT applicable would be passed on, in turn, to their beneficiaries. If the assets are kept indefinitely it could be deferred for generations

To help you understand how it works, let's imagine that you have been left an investment property by your mother who has recently died.

If she bought it before 20 September 1985, it would be CGT free and you will be deemed to have acquired it on the date of her death at its market value then.

Suppose she paid $90,000 for it in August 1985 and its value was $400,000 when she died on 1 April 2008.

For tax purposes, you are deemed to have bought it for $400,000 on 1 April 2008 - you receive the property with no CGT liability because the original owner had none.

If she acquired the property after 20 September 1985, it is subject to CGT and any capital gain is effectively transferred to you.

For example, if she bought it for $90,000 on 1 October 1985, the Tax Office will assume that you acquired it for just $90,000.

The same principles apply to the family home. Usually it will be exempt from CGT and in most cases will be deemed to pass to the beneficiaries at it market value at date of death.

However, it must be disposed of within two years of the deceased’s death for it to retain its tax free status.

Be aware that special rules apply if the deceased rented out the property at any time, or if the deceased was absent from the property for six consecutive years as may happen if they spent a long time in a nursing home.

As you can see, it’s simple but the examples do highlight the importance of seeking advice before you sell any assets that you have received through a will as you may find yourself facing an unexpected CGT bill.