Tax Bites: Bequeaths of assets to non-residents of Australia

It is not uncommon to come across bequeaths of assets under the Will of a deceased person to non-resident beneficiaries.  For example, this could occur simply where a child of the deceased has relocated overseas.

In circumstances where a deceased gifts an asset/(s) to a non-resident beneficiary of Australia, CGT Event K3 can be triggered without the availability of CGT rollover relief that ordinarily applies on the death of an individual.  Specifically, CGT Event K3 is triggered where a CGT asset (other than a pre-CGT asset of the deceased or an asset that is Taxable Australian Property) “passes” to a non-resident beneficiary.  When CGT Event K3 is triggered, the CGT Event K3 capital gain is disclosed in the final income tax return of the deceased rather than the first income tax return of the deceased estate.

As mentioned above, assets that represent Taxable Australian Property will not be subject to CGT Event K3.  This is because these assets will retain their connection with Australia and will therefore continue to be subject to CGT in Australia as and when the assets are sold.  Assets that represent Taxable Australian Property and will therefore be excluded from the application of CGT Event K3 include real estate located in Australia, and non-portfolio interests in entities (ie shareholdings/unitholdings of at least 10%) that principally hold real estate located in Australia. All other assets that do not represent Taxable Australian Property assets (eg a share investment portfolio) could trigger CGT Event K3 if the assets are bequeathed to non-resident beneficiaries.

The trigger point for CGT Event K3 is when an asset “passes” to a non-resident beneficiary.  Therefore, where there are multiple beneficiaries of the estate and where the Executor of the estate does not otherwise have discretion as to the which assets are distributed to particular beneficiaries, it may be possible for the beneficiaries to collectively enter into a Deed of Arrangement prior to assets passing to any particular beneficiary.  The objective of the Deed of Arrangement would be that non-resident beneficiaries forego interests in CGT assets that would otherwise trigger CGT Event K3, in lieu of receiving additional other assets of the estate that will not trigger CGT Event K3 when the asset passes to them (eg additional cash or additional real estate).  Prior to a Deed of Arrangement being entered into however, the CGT and stamp duty implications of the agreement would need to be considered.

If you have any further questions, please do not hesitate to contact Tim Olynyk on (03) 9810 0700 or at t.olynyk@banksgroup.com.au.

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