CGT event K3 - Key to estate planning

Australia doesn’t have death taxes – right? - The potential trap of CGT event K3

Generally, where assets pass to beneficiaries through an estate, capital gains are disregarded – as Australia does not have death or inheritance taxes. The one exception is where assets of an estate pass to a tax-advantaged entity such as: an exempt entity; the trustee of a complying superannuation entity or a foreign resident. This is referred to as CGT event K3.

What assets are subject to CGT event K3?

A CGT asset is:

•  any kind of property; or
• a legal or equitable right that is not property.

CGT assets include part of, or an interest in an asset, goodwill and an interest in a partnership.

Examples of CGT assets include:

• land and buildings;
• shares in a company;
• units in a unit trust;
• options;
•  debts owed to you;
• a right to enforce a contractual obligations;
•  foreign currency.

When does CGT event K3 occur?

The CGT event is treated as occurring just before death. Any capital gain or loss as a result of CGT event K3 will be included in the final tax return. A capital gain or loss will be disregarded if the asset was acquired before 20 September 1985.

Are all assets transferred to foreign residents subject to CGT event K3?

For foreign residents, CGT event K3 only occurs where the asset being passed to the foreign resident is non-Taxable Australian Property, and the deceased was an Australian resident prior to death. Taxable Australian property includes:

• Real property in Australia
• A CGT asset that is an indirect interest in Australian real property
• A CGT asset that has been used at any time in carrying on a business
• An option or right to acquire one of the CGT assets described above.

Examples of non-Taxable Australian Property assets include listed shares, shares in private companies, units in unit trusts. These assets will all be subject to CGT event K3.

When does an asset ‘pass’ to a beneficiary?

An asset will pass to a beneficiary when the beneficiary becomes absolutely entitled to an asset (whether the assets is later legally transmitted or transferred to that beneficiary). Further, the legislation states that assets can pass to a beneficiary in the following ways:

• Under the taxpayer’s will, or that will as varied by a court order;
• By operation of intestacy law, or such a law as varied by a court order;
•  Where it is appropriated to the beneficiary in respect of an interest in the estate; or
• Under a deed of arrangement with the beneficiary to settle a claim over the estate.

Why is tax planning important?

Administering a deceased estate can be a traumatising experience, with the added stress of understanding confusing tax, trust and estate laws. It is even more confusing where an indirect interest in Taxable Australian Property needs to be identified, to ensure the estate is not subject to unnecessary taxes. We believe it is important to understand your tax and estate planning options prior to death, to ensure that your wishes are met and there is less strain on your family following your passing.

As the time of estate planning, your beneficiaries may be residing in Australia, however it is very common, now more than ever in the post COVID world, that Australians may live and work overseas. Ensuring that your estate planning is revisited when a beneficiary moves overseas is vital, to ensure no additional tax is paid when transferring your assets to loved ones.

How can Tax Controversy Partners help you?

Understanding the tax implications of your estate planning is important – to avoid any unexpected or unnecessary taxes. We can help you consider the terms of a will or testamentary trust to understand how/if beneficiaries will be taxable on certain assets, with specific reference to CGT event K3.

At Tax Controversy Partners, our experienced lawyers can assist you in providing advice on tax issues affecting estate planning and assist in managing those risks. Please contact us using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.