What Happens When An Australian Expat Receives an Inheritance?
Whilst abroad and living the life as an Australian expat one of the most terrible things to hear is that a family member back home has passed away. This can sometimes mean you may be the beneficiary of some form of inheritance, whether it be shares, cash, property and personal use assets such as a car. It is essential that you seek financial advice because depending on the type of asset you might be liable to pay tax on that asset. In this post we will run through some of the considerations of what happens when an Australian expat receives an inheritance?
Do Asset Types Matter When An Australian Expat Receives an Inheritance?
If a Australian expat receives an inheritance and it is a parcel of shares, and that Australian expat is a non-resident for tax purposes, then they are not deemed to have a direct interest in Australian real property, and the asset is then classified as being a non-TARP asset. Therefore if the Australian expat chooses to sell these holdings after inheriting them there will be no capital gains tax to pay on them in the Australian tax system.
However if we compare this to a Australian expat who is a non-resident inheriting a principal residence of someone, this is deemed to be a TARP asset, and therefore it could attract capital gains tax on the asset. This is dependent on what the beneficiary intends on doing with the property. The examples below provide some clarity on how this may be treated and whether the ‘Main Residence Exemption’ would apply.
Example 1 – An Australian expat inherits the Main Residence
Fred acquired a dwelling on the 12th of February 2001, moving into it and establishing it as his main residence as soon as it was first practicable to do so. He continued to reside in the property and it was his main residence until his death on the 12th of September 2017.
Melanie, Fred’s daughter, inherited the dwelling following Fred’s death. Upon inheriting the dwelling, Melanie rented it out. It was not her main residence at any time. On 20th of January 2021 Melanie signs a contract to sell the dwelling and settlement occurs on the 20th of February 2021.
Melanie resides in Paris and is a foreign resident for the whole of the time she has an ownership interest in the dwelling. Melanie is entitled to a partial main residence exemption for the ownership interest that she has in the dwelling at the time she sells it, being the exemption that accrued while Con used the residence as his main residence (12 February 2007 until 12 September 2017).
She is not entitled to any main residence exemption that she accrued in respect of the dwelling (12 September 2017 until 20 January 2021), nor can she apply the 2-year exemption rule of inheriting a dwelling. This is because she was a foreign resident on the 20th of January 2021, the day on which she signed the contract to sell her ownership interest, which is the day on which the CGT event occurred.
Note: Melanie will need to apply section 118-200 of the ITAA 1997 to work out the amount of the capital gain or loss that she realises from the sale of the ownership interest in the dwelling.
If Melanie had instead sold the dwelling on or before the 12th of September 2019 she would have been entitled to a full main residence exemption. This is because the whole of the main residence exemption would have, or would be taken to have, accrued from Con’s use of the residence. This includes the two year period following Fred’s death.
Conversely, what if a non-resident was to inherit an investment property? How would this be treated from a tax point of view?
Example 2 – An Australian Expat Inherits an Investment Property
Jean currently lives in Cambodia and has been a non-resident since the 2nd February 2008. She inherits an investment property from her uncle on 18th January 2016. The investment property was purchased on the 8th April 2010 and at no time did Jean’s uncle use this as his permanent residence.
Jean decides to continue to rent out the investment property until 5th February 2017, upon which she chooses to sell it on the 8th March 2017.
Jeans cost base is that of her Uncle’s back on the 8th April 2010 for $250,000 and she ends up selling the property for $675,000. The entire ownership period which Jean has looked after the property has been while she has been a non-resident which means it will impact the tax concessions she will receive in comparison to a standard tax resident of Australia.
The 50% CGT discount for Non-residents was abolished as of the 8th May 2012 and therefore any capital growth after this period will be subject to no discounting. Jean seeks advice from her financial adviser who tells her to get a valuation by an ‘Accredited Valuer’ for the value of the property on 8th May 2012. If she does this, it will quarantine the capital growth of the property that she is able to apply the 50% CGT discount.
The value of the property on 8th May 2012 is $325,000. This means that the $75,000 ($325,000-$250,000) capital gain for this period can be discount by 50% to $37,500.
Jeans’ reportable capital gain will be made of two parts:
- Gain from 8th April 2010 to 8th May 2012 = $37,500 (50% Discount)
- Gain from 9th May 2012 to 8th March 2017 = $350,000 ($675,000-$325,000)
Total reportable capital gain = $387,500
It is imperative that Australian expats seek tax and financial advice when it comes to these matters. The responsibility falls on the executor to do so. Cash and Personal use assets are not treated as taxable assets, and therefore no liability would fall onto the beneficiary.
Disclaimer – The above commentary is general in nature and should not be construed as tax or financial advice. Please consult a licensed tax accountant and financial adviser to determine whether the above information is suitable for you.