You’ve acted for an old friend Shirley for a very long time. You are aware that she has two sons, Bob and Barry and a daughter Billy whom you have never met or know much about. Bob had a horse riding accident some years ago and acquired a severe back injury that resulted in him losing his job and turned to drinking.
His marriage, you suspect, is also on the rocks, as his wife who commutes daily for work moved back to Sydney. Barry who’s finally settled down with ‘the one’ much to Shirley’s relief, had been taken for a ride by a few earlier girlfriends and has next to nothing in the bank and rents a tiny one bedroom cottage on a friend’s farm.
You receive a phone call from Shirley early one morning who tells you she is in hospital about to have major surgery and wants to make sure her affairs are in order. You had been trying to get Shirley to make a will since her late husband died but she constantly avoided the topic. Shirley asks you to appoint her three children as the executors and leaves everything to them equally initially but then begins to wonder whether she should leave her unit, which has significantly increased in value at Bondi Beach, to Bob so that he could start fresh in Sydney. But then wonders whether he would want it now that his marriage was in trouble. Shirley can’t make up her mind and asks you to give Bob the option in her will to buy the unit as part of his share. He could then choose between buying it for effectively a third of the value or let it go equally between him and his siblings under her will. You prepare the will right away and don’t think too much about it, you’re just glad that Shirley has finally made a will. Bob, Barry and Billy come to see you weeks later to get probate of Shirley’s will after she dies of complications. As Bob’s marriage is improving, Bob is pleased that Shirley gave him the option to buy the unit so that he has a place in Sydney to start over.
If Bob exercises the option to buy the Bondi Beach unit there will be huge CGT to pay because when the unit is transferred it will not be a CGT free transfer under a will, it will be a transfer as though it was sold at market value to someone else, see section 128-20 (2) ITAA 1997 which says “A CGT asset does not pass to a beneficiary…. if the beneficiary becomes the owner…. because your LPR transfers it under a power of sale”. You wished that Shirley had asked Bob whether he wanted the unit because if the unit were simply left to him in the will it would have passed CGT free.
You hope that there are other (and enough) assets in Shirley’s estate to do an appropriation of assets so that the unit can be transferred to Bob without CGT and stamp duty. You know that Shirley had owned a house in town but knew it wasn’t worth anywhere near as much as the unit. Luckily you further discover she also owned a vacant block of land, shares and cash. Barry says that he is more than happy to take the house in town and some money so that he can move out of his shoebox and get married. Billy who has a house of her own and happily married doesn’t mind what she gets as part of her share.
Under s 128-15(3) of the ITAA 1997 any capital gain made when as asset “passes to” a beneficiary is disregarded, and under s128-20(1)(c) as asset “passes to” a beneficiary who becomes an owner of an estate asset after an appropriation by the executor “in satisfaction of….. a share in your estate”. In relation to stamp duty, s63(1)(a)(iii) of the Duties Act would impose nominal duty of $50 on the transfer if appropriation is in “…satisfaction of the beneficiary’s entitlement under… the will of the deceased person”.
Shirley’s assets are valued and luckily an appropriation of assets can be done.
However, Bob, Barry and Billy are faced with another dilemma.
If an appropriation of assets is done, and the unit is transferred to Bob as part of his share of the estate, the estate will not be liable for CGT or stamp duty. But upon the transfer of the unit to Bob, Bob will inherit the accrued CGT, which means that if and when he decides to sell the unit down the track, he will bear the CGT cost then.
And, if Bob chooses to exercise his option in accordance with the will, the estate (the three of them) will bear the CGT cost.
So, who should pay the CGT….
This article is general information only and should not be relied on without obtaining further specific information.