Sadly death comes to everybody. It is a natural part of life.
When a loved one dies it is a time of reflection, mourning and grief. A time for sometimes being alone and for sometimes being with family.
It is not a time to drive into Perth and see your lovely tax accountant. However for families with businesses and for families with wealth; the moment of death has a large impact on how assets in the family group are taxed and how they become transferred.
Discuss everything upfront
Your extended family should have a relationship with your family business accountant, family business lawyer, independent investment advisor and family business coach. If the first time you meet the deceased’s trusted advisors is when a family member is deceased: then a bad outcome is potentially on the table.
A long term strategy of fostering strong communication lines and discussion about the business and the business wealth of a family should be in place. This is not a case of simply seeing somebody and getting a few documents prepared: this is a process of creating engagement and communication upfront.
Understand the tax treatment
Part of the discussion and understanding extends to how the family assets are taxed when your loved one dies. This is complex and changes the net outcome that happens when certain assets are transferred.
Getting to a point of understanding this treatment will take several years if done progressively. The tax system is complex and increases in complexity as the family wealth increase.
Understand the purpose
We know that around a quarter of family business wealth that is transferred fails simply because the wealth inheritors have not been prepared to receive the money (“Preparing Heirs’, Williams and Preisser © 2012)
A discussion of the history of the family wealth, intended purpose and family vision are an integral part of engaging future generations. If this process is done, with care and an external person guiding the process, the likelihood of family wealth being destroyed is significantly reduced.
The tax treatment of the family home
The main residence of an individual can be sold tax free (s181-110 1997 Tax Act). And that tax exemption can apply for up to two years after the date of sale (s118-200).
This is important. At the time of death the estate can be confusing. It might take a while for the family to sort out their affairs and think about the sale of the property. It might take even longer for the family to drive into Perth and go see their business accountant.
You do not need to sell straight away. The tax system is not compelling you to do something right now. If the family is unsure of how they feel about selling the home you can sit and wait, or do something else like rent it out.
Income of the trust estate
A deceased estate will still earn income. Dividend cheques will still come in and the bank will still pay interest (as so they should!). If the deceased owned rental properties the rent will still be paid and business income and trust income, can still be generated.
From a tax point of view there is now two “people”. The deceased has a tax position up until the data of death and the deceased, from the date of death is also now a person.
The deceased estate will have its own tax file number and income tax return. It will be taxed just as if it were a “living person”.
This is important. A deceased estate is technically a trust: and if a trust does not distribute all of its income by the end of the financial year the trustee incurs tax at the highest tax rate. However with a deceased estate you have the benefit of time – you can talk to the beneficiaries and fully understand the process before income is distributed. Further, sometimes an estate is challenged and it takes a while to manage the challenge through the courts.
And this benefit can be enjoyed for an additional three years after the date of death of the deceased.
Tax position of assets
If you inherit an asset you typically also inherit the tax position of the asset. That is, you inherit the tax purchase price of the asset and the tax acquisition date of the asset (s128-15 1997 Tax Act)
This is important. If a deceased had two assets of the same value – with one asset as the family home and the other asset as a rental property – simply allocating one house to one person and the other to the other will not make it the same. The rental property could potentially have a higher inbuilt tax liability than the family home.
If you inherit an asset that was acquired before 19 September 1985 you are given a tax purchase price, and date, of the asset equal to the market value of the asset at the time of death. This is important. Market valuations, or evidence of market value is often sought with a deceased estate for tax purposes.
Likewise, if you inherit a main residence, your deemed tax purchase price of the property is the market value of the home at the date of death.
Taxation of superannuation on death
When you die your superannuation fund is affected as well. However it is important to note that your will, prepared by your lawyer, does not cover your superannuation fund. It is separate.
In any event the superannuation fund proceeds are affected by the age and profile of the deceased.
We can only give a high level tax overview of superannuation fund payments – however Division 302 of the 1997 Tax Act covers this area.
Superannuation proceeds paid to a living spouse or to living dependents are tax free (a dependent is somebody under 18). There are rules for older kids as well (under 25) that can be used with planning.
Superannuation monies that are paid to somebody who is not a spouse or somebody who is not a dependent typically attract tax. The tax rate is 17% if the component is a “concessional component” and tax free if the component is a “non-concessional” component.
If the age of the deceased is before retirement then different tax outcomes happen as well.
This tax is often hidden in a family wealth position. Good tax advice by an independent tax advice is needed to plan and manage this position.
Sometimes superannuation monies can be left in a superannuation fund when bequeathed to a spouse (and even a child). These rules are again complex.
Plan plan and plan
There are additional rules about the taxation of your annual leave and long service leave. Trusts are affected by the death of a person and the timing of transfers of an estate to the deceased can also be planned to achieve great, and fair, outcomes.
Further, non-residents, and deceased person with overseas assets are affected differently as well. Likewise other tax entities such as a testamentary trust have a different tax profile.
As a practice we are fortunate to receive many referral from big Perth CBD law firms to assist in the tax treatment. The takeaway is that careful, long term planning looking towards taxation, business succession, family culture and legal triggers must be considered in a collaborative environment.
The rules associated with deceased estates can often seem daunting, especially during a tragic time. Let our experts in estate planning guide you during this process.