Super Tax and the Family Home
When the family home and super can incur tax
With property and superannuation the two most widely held and potentially valuable assets among the baby boomers, it makes sense that a portion of either of these could be passed to future generations.
While there is no such thing as death duty in Australia, the tax man could end up doing quite well from inherited property and super assets. When it comes to inheriting property and other investment assets, the taxing point is when the assets is subsequently sold.
Where a person inherits a family home, they have two years to sell it tax free. After that, the potential for capital gains tax largely depends on when the home was bought.
A house bought after 1985 and sold after the two-year-tax free period would incur capital gain tax on the difference between what it is sold for and what the deceased paid. If bought pre-1985, the duty would be levied on the difference between what it was sold for and the market value at the time of death.
Where a house is to be sold, he says, it is important to note it has to be sold and settled within the two-period after death to avoid tax.
If you sell the property one month before the two-year grace period, and the property has a standard 60 day settlement, then you could be liable for capital gains tax on a portion of any gain.
With an inherited investment property that is subsequently sold, the amount of tax will also depend on whether the property was bought pre-1985 or post-1985 in the same way as the family home.
When CGT is payable, there may be a 50 per cent discount if the asset is held for more than 12 months.
Although the general rule is that the discount is only available where the CGT asset has been owned by the taxpayer for at least 12 months, in the situation where a beneficiary of a deceased estate acquires a post 12-CGT asset within 12 months of the disposal they may be eligible for the CGT discount.
This is because assets acquired by the beneficiary will, for the purposes of claiming the CGT discount, generally be treated as having been owned by the taxpayer for at least 12 months, as long as the collective period of ownership of the deceased and the beneficiary is at least 12 months.
But a pre-CGT asset of a deceased person is taken to be acquired by the beneficiary at the date of the death of the deceased.
With super, the calculations around what tax may need to be paid by the beneficiary is more complicated, depending whether they are a dependant or non-dependant under the relevant legislation. There may also be life insurance arrangements.
Inheriting super money can involve hidden duty traps. A super fund may include contributions that are fully taxed (employer contributions and salary sacrifice) and untaxed (such as additional tax-free contributions).
An adult beneficiary who received super benefits can pay tax anywhere between 0 per cent and 30 per cent depending on how the deceased made the contributions.
It depends on how the superannuation went in as to how it is taxed when it comes out. The tax implications of receipt of fully taxed contributions can have quite an impact on the benefit received from the fund.
A common strategy for retirees between 60 and 65 is to withdraw what would otherwise be a taxable component on death (tax free after age 60) and recontribute it, subject to contribution limits, as a non-concessional contribution. That part of any death benefit would be received by the beneficiary tax free.
As an additional strategy, super fund member could establish a second account-based pension which could potentially be 100 per cent pension which could potentially be 100 per cent tax free. The original account-based pension may still have a taxable component.
The taxable and non-taxable amounts between two pension accounts, the retiree could draw as such as they needed to live off from the pension with taxable contributions and the minimum from the other pension.
When it comes to death, it might be that the taxable component of someone’ super has been reduced to zero and anything that is passed on is duty free.
Maintaining assets in an estate for a period of time after death can also carry Ttax advantages.
For example, a beneficiary may inherit $100,000. If the assets are maintained in the estate, they are then allowed a period of up to three tax returns where any income is only taxed at individual tax rates. After the three tax returns they may be taxed at the top rate depending on circumstances.