Inherited assets: What you need to know about pre-CGT vs post-CGT investments

    What you need to know about preCGT vs postCGT investments 1138x756

    By Chris Holloway, Senior Manager, Taxation Services at Equity Trustees
    An inheritance can change your financial future, but it can also come with hidden tax traps. Senior Taxation Manager, Chris Holloway, explains how to navigate capital gains tax with confidence and clarity.

    Inheriting assets such as the family home, shares, or an investment property can be financially rewarding but it can also present unexpected tax challenges. One of the most common pitfalls is understanding the capital gains tax (CGT) implications of asset inheritance, particularly when it comes to distinguishing between pre-CGT and post-CGT assets.

    What happens when someone inherits a pre or post-CGT asset?

    The tax implications of inheriting an asset depends on when the deceased acquired it: was it before or after the introduction of CGT on 20 September, 1985?

    If the asset was purchased after CGT began, the beneficiary inherits the deceased’s cost base – the original purchase price plus any associated costs. When the asset is eventually sold, any capital gain or loss will be calculated based on this inherited cost base.

    If the asset was purchased before CGT began, the cost base is reset to the market value at the date of the deceased’s death. This reset can significantly impact the amount of CGT payable upon the sale of the asset, as the capital gain or loss will be calculated from this new cost base.

    Does the type of asset matter?

    The type of asset you inherit influences its tax treatment. For example, inheriting property will yield different implications to inheriting shares.

    Housing, especially the family home, can be eligible for a full CGT exemption if sold within two years of the deceased’s death, regardless of whether it was acquired before or after the introduction of CGT. However, the exemption may be lost or reduced if you sell it after the two-year window period or rent it out during that time. If the deceased acquired a property pre-CGT, the same conditions apply for a full CGT exemption. However, the property could be either a main residence, or a rental property. If the CGT exemption conditions are not met, the cost base of a main residence will become the property value at the date of death, while and the cost base of a rental property will be determined according to whether it was purchased pre-CGT or post-CGT.

    For shares, if the deceased acquired the shares pre-CGT, the cost base will reset to the shares’ market value at the date of death. Any capital gain or loss on the shares will be calculated from that point forward. For post-CGT shares, you will inherit the deceased’s original cost base and any CGT is calculated from their original acquisition date. Accurate record-keeping, including acquisition dates, cost base details and any dividend reinvestment or capital returns will be vital to determine your CGT liability, and avoid costly mistakes.

    What records and valuations are required?

    For pre-CGT assets, obtaining a reliable valuation at the date of death is essential, as the valuation will form the new cost base. Without it, the Australian Taxation Office (ATO) may apply its own assessment, which could lead to higher tax. For post-CGT assets, you’ll need to obtain records of the original purchase price, acquisition costs and any improvements made during the deceased’s ownership.

    Common scenarios and CGT impacts

    Several scenarios can affect the CGT implications of inherited assets:

    • Joint inheritances: When assets are inherited jointly, each beneficiary will be responsible for their share of the CGT. This can complicate tax calculations and require careful coordination.
    • Using an inherited asset as an investment: Converting an inherited asset into an investment property can remove certain CGT exemptions, such as the main residence exemption, leading to higher tax liabilities.

    Common misconceptions or mistakes

    • Assuming inherited assets are exempt from CGT: One of the most common misconceptions is that inheritance automatically means no capital gains tax. While certain exemptions, such as the main residence exemption may apply, they are not universal. Eligibility will depend on how and when the asset was used or sold.
    • Not obtaining a valuation at the date of death: Failing to get an independent valuation at the time of inheritance can lead to inaccurate cost base calculations, potential disputes with the ATO and unexpectedly high tax liabilities down the track.
    • Believing CGT can be avoided through transfers: Transferring an inherited asset to another individual or into a trust does not eliminate CGT obligations. In fact, it may trigger tax consequences. That’s why it is essential to understand the implications of any ownership changes before proceeding.

    The value of professional advice

    Navigating the complexities of CGT on inherited assets can be challenging. 

    Seeking professional advice from a tax specialist can help beneficiaries to understand their obligations, optimise their tax position and avoid costly errors. A tax professional can provide tailored advice based on the specific circumstances of an inheritance and ensure compliance with tax laws.

    Effectively managing inherited assets starts with understanding the differences between pre and post-CGT assets, keeping accurate records and seeking professional advice. With the right information and support, beneficiaries can make confident financial decisions, minimise tax liabilities and avoid common mistakes that may arise during the inheritance process.

    “Seeking professional advice from a tax specialist can help beneficiaries.”