You acted for Barry and Betty when they applied for probate of the will of their late mother Bertha. Barry is an investment banker and Betty a barrister – both with young children and both very busy.
The will appointed Barry and Betty as executors and left everything to them equally. The estate comprised a commercial investment property with two strata units and a listed share portfolio. Betty had helped Bertha manage her investments so the records were immaculate.
Preparing the documents was therefore very straightforward. When Barry and Betty came to your office to sign the documents, you asked if they were fine with having the property and shares simply transferred to them equally. They said they weren’t sure but would speak to their accountant, Beatrice, and let you know. So, they said, just leave it in both names till we get back to you.
You commented that this should be okay so long as you both end up with equal values, and off they went. You put the shares and real estate into their joint names, taking care to make sure they were tenants in common of the real estate to avoid problems if one of them should die before the issues were resolved.
Nothing happened until later in the following year when Beatrice (your client’s accountant) contacted you to arrange a meeting to discuss…
The stings
Beatrice initially apologises. She says that shortly after Bertha’s death, Barry and Betty had mentioned the need to discuss how to deal with the assets but she was very busy at the time and, as she says, you know how quickly time drifts by… You say that if there is a problem you also feel bad because you should have been pushing Barry and Betty to resolve things too.
Beatrice tells you of the agreement that Barry will take the smaller unit and Betty the larger with the shares being divided to create equality. All assets being acquired after September 1985 when the CGT provisions commenced, Beatrice is worried about the tax situation.
Your first hope is that the partition concessions under the Duties Act will at least remove any duty problems. However, when you look at section 30 you see that the partition provisions only apply to partitions of land held jointly and that the difference in value between the larger and smaller strata units will be subject to duty at ad valorem rates. You observe that at least transfers of listed shares are exempt from duty.
Then you realise that if action was taken while administering the estate, Barry and Betty could have used the appropriations power in section 46 of the Trustee Act to appropriate the smaller unit to Barry and the larger to Betty. If they did, section 63(1)(a)(iii) of the Duties Act would have imposed duty of $50 on the transfers as appropriations in “… satisfaction of the beneficiary’s entitlement under … the will of the deceased person…”
So, you tell Beatrice, you feel pretty bad about that.
Then it is Beatrice’s turn. She says that had she pushed the issue earlier, much the same thing could have happened from a CGT point of view. She explains that under section 128-15(3) of the Income Tax Assessment Act 1997 any capital gain made when an asset “passes to” a beneficiary is disregarded and that under section 128-20(1)(c) an asset “passes to” a beneficiary who becomes the owner of an estate asset after an appropriation by the executor “in satisfaction of… a share in your estate”.
Unfortunately, Beatrice continues, that can no longer apply because the estate is fully administered. Under IT 2622 the ATO considers an estate has been fully administered when, essentially, all estate debts and legacies have been either paid or provided for. Given the estate was wound up months ago this is obviously the case.
This leaves Barry and Betty joint owners of the investment real estate and the share portfolio. According to TD 45, on a partition each co-owner has a disposal for CGT purposes of their share in the asset taken by the other.
Barry and Betty will therefore each have an assessable capital gain of half the amount by which the present value of the half share in the unit and shares taken by the other is greater than half the cost of them to Bertha when she bought them many years ago.
So you and Beatrice reflect that, if either of you had pushed hard enough, Barry and Betty would have had minimal stamp duty and no CGT to pay. Then you discuss how best to tell them – and decide maybe after a long lunch at a swish restaurant. Then you toss a coin to decide which of you will break the news.
Snapshot
1. Always consult with your client’s accountant about estate investments.
2. Remember there are significant CGT and duty concessions in administering estates.
3. Never delay the resolution of estate issues.
This article is general information only and should not be relied on without obtaining further specific information.
By Jim Main
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