Media Release
Avoiding Capital Gains Tax on Death
29 October 2007
Avoiding the CGT trap
Death tax is not the only hurdle superannuants need to jump in an effort to avoid lumbering their children with unnecessary tax on their passing. So is capital gains tax (CGT).
Australians’ “love affair with bricks and mortar” and their reluctance to sell their property to avoid CGT at death has long been a problem to self managed super funds investing in property.
However, this problem has intensified with the explosion in both the number of people investing in super and the increasing levels of property now held in super funds.
Says superannuation expert, Martin Murden, who is also director of Partners’ Superannuation Services: “Investment in property isn’t the problem. The problem is people’s reluctance to sell their property even when they begin receiving a pension.”
(When a fund is in pension mode, the tax rate on income - derived from the assets used to provide the pension - falls to zero, making this an attractive time to sell property in the portfolio.)
According to Mr Murden the properties causing the biggest CGT headaches are family farms and premises from which family businesses operate.
“The problem is that in many instances the superannuant’s children are either operating the farm or running the family business and parents’ reluctance to sell stems from not wanting to impose an external landlord on their children. However, it is often for purely sentimental reasons – they just don’t want to get rid of the property.”
Mr Murden says they overlook the fact that when they die and these properties are sold, non tax dependant beneficiaries will be liable for both the 16.5% on the taxable component of their super as well as the CGT.
“For properties held more than twelve months, this is effectively 10% on the increase in value,” he says.
“A good example of the impact of CGT involves a SMSF which purchased a $220,000 property over 12 months ago. Since then it has increased in value to $500,000. Beneficiaries now face a whopping CGT bill of $28,000 should their parents die.”
How can parents help their beneficiaries avoid the CGT?
Essentially there are TWO options open to them:
Option 1
- They can take the property out of the fund prior to death
- The positive – there is no CGT payable at death
- The negative – income (rent) received after the date of transfer will be taxable at marginal rates
Note: Stamp duty may also be payable on the transfer.
Option 2
- Make the child operating the farm/business and his/her spouse/partner members of the SMSF
- The maximum membership for a smsf is four
- Aim – by the date of death of both parents the fund has assets, other than the property, which in total are equal to the parents’ account balance
- The positives
- allows the property to be retained by the fund and moved from one generation to the next without CGT being incurred
- keeps the income in the tax exempt environment
- gives diversification for fund assets
- helps with cash flow when property is a large percentage of fund
- The negative – this is difficult to use if more than two children are involved in the family business.
Note: With investments such as listed company shares, listed property trusts and managed funds, the CGT issue is easier to overcome whilst pensions are being paid.
More about Martin Murden …………
He is one of Australia’s leading authorities on self managed superannuation funds (SMSFs) with over 35 years experience in financial services. A CPA, he has specialized in the area of providing superannuation advice. He is also a director of Partners Superannuation Services, part of the Partners Group of companies.
For more media information contact:
Martin Murden on 0416 186 589
Wendy Parker on 0422 694 503.
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