Tax implications for the estate when a foreign resident beneficiary is involved

It is becoming increasingly common for beneficiaries of deceased estates to be foreign residents.  Estate distributions to foreign residents may have unfair consequences for other beneficiaries.  

Other than “taxable Australian property”, all assets that pass to a foreign resident through an estate will be subject to capital gains tax (CGT).  Rollover relief that may ordinarily apply for CGT does not apply in those circumstances.

The consequence for the estate is that the deceased is deemed to have disposed of the assets that pass to a foreign resident at the date of the deceased’s death. The value used to calculate the CGT payable is the market value of the assets as at the date of death.  Any applicable CGT must be recorded in the deceased’s date of death tax return and any applicable tax must be paid by the estate accordingly.

Unless the Will contains a provision that allows for an adjustment in these circumstances, the tax payable will be deducted from the residuary estate.  This may mean that the tax applicable to a foreign resident beneficiary is paid from the share of the estate of another beneficiary, which could cause an unfair outcome.  

For example, let's imagine a scenario where dad leaves the whole of his estate to his three daughters equally.   The estate comprises $500,000 in cash and 3,000 shares in Commonwealth Bank (CBA) which dad purchased in 1987 for $10 each.  If one of the daughters is a foreign resident, and she receives 1,000 CBA shares as part of her 1/3rd share, dad will be deemed to have disposed of those 1,000 shares at the date of his death at the market value .  If the market value is then $80 a share, the shares would be worth $80,000 and so there would a capital gain of $70,000 ($80,000 minus the original cost of $10,000).

Dad’s date of death tax return would need to include the $70,000 capital gain and the tax assessed would have to be paid out of the $500,000 in cash.  This causes two issues for the Australian daughters:

  1. their share of the cash will be reduced to pay the tax applicable on their foreign sister’s shares; and
  2. the CGT applicable on their shares will have to be paid by them when they are sold in the future.

To prevent that scenario from occurring it is important that a clause is included in the Will allowing the executors to pay any estate tax which arises as a result of a beneficiary being a foreign resident from the foreign resident’s share of the estate.  In the absence of such a clause, the consent of the foreign resident beneficiary is required and it may not be forthcoming.

This article was written by Solicitor, Jenny Tummel

Practice Area: Wills & Estates

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