How Capital Gains Tax applies to Inherited Assets

Generally, capital gains tax (CGT) does not apply when you inherit an asset. However, when an inherited asset is sold CGT may have an unexpected impact on the amount of tax payable on the sale proceeds.

Disposing of inherited assets

When you sell an asset, you have inherited, and the asset is not a property, the normal rules apply for calculating your CGT.

If the asset is a property, such as a house, it may qualify for the main residence exemption from CGT depending on whether it was the deceased’s main residence and when you sell it.

For collectables such art works, antiques and jewellery or personal-use asset such as furniture, boats and electrical goods the normal rules apply – that is, the asset is subject to CGT unless it was acquired for less than the thresholds for these types of assets.

Cost of the asset

Unless the asset you inherit is fully exempt, you will need to know its cost base to work out your CGT when you sell it. Depending on the circumstances, the cost base may be based on the value of the asset:

when the deceased acquired it; or
when they died.

Eligibility for CGT discount or indexation

Australian resident individuals, trusts and super funds can use the CGT discount to reduce their capital gain on assets they have owned for 12 months or more. For the purposes of qualifying for the CGT discount, you can treat an inherited asset as though you have owned it since:

the deceased acquired the asset, if they acquired it on or after 20 September 1985
the deceased died, if they acquired the asset before 20 September 1985.

If the deceased died before 21 September 1999, you have the option of indexing the cost base instead of using the discount. This involves calculating your capital gain by using the asset’s cost base indexed for inflation up until 21 September 1999. If you use indexation, you are taken to have acquired the asset when the deceased acquired it.

Winding up a deceased estate

In administering and winding up a deceased estate, the legal personal representative (typically the executor) may need to:

• dispose of some or all of the estate’s assets
• acquire an asset to satisfy a specific legacy and dispose of the asset to a beneficiary.

In these situations, CGT applies when the legal personal representative disposes of the asset. Any capital gain or loss made by the legal personal representative is subject to the normal CGT rules.

Unapplied capital losses

If the deceased had any unapplied net capital losses when they died, these do not transfer to you as a beneficiary or legal personal representative. This means you cannot use any such losses to offset your net capital gains.

Keeping records of inherited assets

When you inherit an asset, it is important to keep records of:

when the asset was acquired by the deceased
the asset’s value or cost
costs related to the asset that are incurred by you and the legal personal representative of the deceased estate.

These records will help you work out your CGT when you later sell an asset.

If the deceased acquired an asset before 20 September 1985, you will need to know the asset’s market value at the date they died. If the legal personal representative has had the asset valued, ask for a copy of the valuation report. If not, get your own valuation.

If the deceased acquired an asset on or after 20 September 1985, you will need records of the deceased’s cost base for the asset.

Assets passing to foreign residents

When an asset passes to a foreign resident, CGT applies to the deceased’s estate at the time of their death if:

the asset was acquired by the deceased on or after the start of CGT (20 September 1985)
the deceased was an Australian resident when they died
the asset is not taxable Australian property in the hands of the foreign resident beneficiary.

The capital gain or loss on the asset is worked out using:

the market value of the asset at the date of death
the cost base of the asset at that date (for a capital gain) or reduced cost base (for a capital loss).

The capital gain or loss must be reported in the deceased’s date of death tax return.

Assets passing to charities and super funds

If a CGT asset passes to a tax-advantaged entity, CGT applies to the deceased’s estate at the time of their death. A tax-advantaged entity is either:

a tax-exempt entity such as a church or charity
the trustee of a complying super fund or a or complying approved deposit fund or a pooled super trust.