Effective estate planning is crucial to ensuring that a deceased person’s hard earned wealth is distributed effectively to the intended beneficiaries in a tax efficient manner.  A testator’s failure to plan in advance may mean that a significant portion of their estate is used to pay taxes to the ATO.

Capital Gains Tax

Subject to some exceptions, CGT is the tax which must be paid on the ‘capital gain’ arising from the disposal of an asset acquired on or after 20 September 1985.  Although CGT is generally not payable on the transmission of assets to the executor or from the estate to a beneficiary, CGT will be triggered on any subsequent disposal.

The CGT rules can be quite complicated but a significant factor is the date in which the asset was originally purchased. If the asset was purchased before 20 September 1985 a beneficiary is liable for CGT on the difference between the value of the asset at the date of death and its subsequent disposal.

On the other hand, for assets purchased on or after 20 September 1985 a beneficiary is liable for CGT on the difference between the amount the asset was originally purchased and its value at disposal. Where substantial assets are involved, the tax liability in the former scenario can be significantly lower.

Taxation on Super Death Benefits

Where the deceased held money in a superannuation fund the lump-sum payout is generally tax free where it is distributed to the deceased’s spouse or child under 18 years old.  In the event that the distribution is made to another individual, either through the trustee’s discretion or through a binding death benefit nomination, the payment is only tax free in the following limited circumstances:

  • the beneficiary was in an interdependent relationship with the deceased. Evidence must be produced to establish the support and care aspects of the relationship.
  • the beneficiary was financially dependent on the deceased. Extensive evidence must be furnished to show that the recipient relied on the deceased’s direct financial contributions to meet their basic needs regularly over a period of time.  Importantly, unlike an interdependent relationship, the deceased and beneficiary are not required to have been living together.

In the event that the above criteria are not satisfied the recipient of the superannuation death benefit is liable to pay tax based on the taxed and untaxed elements of the benefit.

Distribution of money and assets from superannuation to individuals who were not financially dependent or in an independent relationship with the deceased can result in thousands of dollars in tax.  Testators should undertake effective estate planning to take into account these wide ranging tax issues to protect their assets and minimise the tax payable.

For assistance and advice on your planning opportunities lease contact our tax and estate lawyers and accountants at The Quinn Group on (02) 9223 9166 or submit an online enquiry form today.