Ken and Mary work in the same legal firm, both focusing on tax and succession. Ken is a bit older and therefore a bit more experienced. Mary is somewhat sharper in her technical knowledge. They work together well, often sharing the workload.
Will and Division 7A Sting
Ken tells Mary one day about his old farmer mate Mike who set up a company back in the 1970s to buy the farm. All the shares in the company have always been owned by Mike. Now he’s making his will. He has two sons – Alan and Roger. The company has two blocks of land, one to go to each.
Mike wants to keep the old family company going so told Ken that Alan, the elder of the two, should get the shares in the company to keep the eastern block, but the western block had to go to Roger. Ken draws up the will on the basis that the shares are given to Alan but subject to the condition that he must make the company transfer the western block to Roger.
Mary reviews the will then say’s to Ken: “hang on – you have forgotten one really important thing!” “What are you going on about?” says Ken – “It is so simple – the land and the shares are all pre-CGT – what could go wrong?”
Mary takes a deep breath then says, “but what about Division 7A – if the Company simply transfers the western block to Roger for no consideration, he will be liable to income tax on the market value of it.” (Section 109C Income Tax Assessment Act 1936.)
OMG! says Ken –I forgot – thank you.
So, Plan B is put into place by which, after Mike’s death, the company will be liquidated and the land transferred separately with no stamp duty or CGT cost. But with a fair bit of detail to work out.
Will and CGT Sting
A few days later Mary tells Ken about her client Helen who owns two commercial properties, which she rents out for a sufficient income to live comfortably. Helen plans to leave one to her daughter Rachel and the other to her daughter Alison, because they do not get on and Helen says it would be a disaster if they became joint owners, even though they will both sell after Helen’s death.
Both have pretty much the same value, although Helen wants a legacy for equality based on the market value at her death.
Ken reviews the will then say’s to Mary: “hang on – you sure as eggs have forgotten something here!” “What are you going on about?” says Mary. “It’s so simple – both properties have the same value – one goes to each, and the transfers are CGT and stamp duty free because they will pass under Helen’s will – how good is that!”
Ken says yes but, didn’t you tell me a while ago that Helen bought one property in 1984 and the other in 1990? There must be a fair bit of accrued capital gain in both cases.
OMG! Says Mary – I forgot – of course – the one bought in 1984 (because it’s pre-CGT) will pass to Rachael with a cost base equal to market value at Helen’s death, but the one bought in 1990 will pass to Alison with the cost base equal to the cost of purchasing the property in 1990.
So, Ken and Mary then sit down to work out with Helen a strategy that would be fair to both daughters. In this case it is relatively easy because Helen knows both daughters will sell the properties after her death. So, to even things up Helen will include in the legacy for equality an amount equal to the CGT that Alison would have to pay if she sold the property for the market value as at the date of Helen’s death.
Estate shares and CGT considerations
A few more days later Susie, the principal probate person in the firm, asks Ken and Mary about the best way to handle a situation where a testator left a substantial share portfolio to her three children equally.
The family are very anxious to finalise the estate and to stop running up legal expenses so they told Susie to hurry up and transfer the shares to us jointly and we will work it out later.
Susie isn’t quite sure about this – her intuition tells her she should check. “So, what do you think?” She asks Ken and Mary.
Mary explains that if the shares are transferred jointly and then split up between them, each of the three will be taken to have dispose of two thirds of their one third share of the portfolio and cop capital gains taxing accordingly.
Ken agrees and asks if there a power to appropriate assets in the will – but Susie says no.
Ken explains that if the assets can be appropriated separately, then each child could be transferred one third of the shares which pass CGT free under the will.
He goes on to say that regardless of the will, section 46 of the Trustee Act 1925 gives a trustee power to appropriate any part of the property of a testator between beneficiaries under obvious conditions of equality of outcome. Each child then receives one third of the shares CGT free.
Mary adds: “but be careful – if the shares were bought at different times they will have different cost bases, so each of the three parcels have to have the same cost bases as well as the same values”.
Susie says thanks and walks away contented, recognising the benefit of having two sets of eyes dealing with a problem. While Ken and Mary both say thank heaven for Susie’s intuition.
Take away points
- Tax is often a problem in succession
- Two sets of eyes are frequently better than one
- Always take intuition seriously
Author – Jim Main – accredited Specialist, Business Law, a fellow Tax Institute of Australia and Lawyer at JMA Legal