I am an Australian citizen who has lived overseas for a number of years. I have recently inherited a number of Australian shares from my father’s estate. (Nothing has gone through yet)
I am told that I am required to pay CGT to the Australian Government, being an overseas resident. If so, how much tax would I have to pay? And what is it based on?
Jane your question probes the intersection of 2 areas of tax law, that being tax payable on inherited assets and tax payable by non-residents of Australia. These can be tacked as 2 separate areas.
Tax on shares acquired by non-residents
The Australian government has a policy objective to encourage non-residents to purchase Australian shares. As such generally non-residents are not subject to tax on shares acquired while they are non-residents. However, as with all tax matters, the tax outcomes are very dependent on the particular circumstances.
Firstly, you need to be sure that you actually are a non-resident for tax purposes. There are no hard and fast rules in regards to residency, with the Australian Tax Office (ATO) looking at the facts and circumstances of each case to determine your residency status. However if you have lived exclusively offshore for a number of years, it is most likely that you will be a non-resident for tax purposes.
Secondly, it depends on the sort of shares you acquire. There are a couple of exemptions to the general capital gains tax exclusion for non-residents, namely where the shares represent a direct or indirect interest in Australian real property, or the asset is used by the non-resident person in carrying on a business through a permanent establishment in Australia. It is unlikely that a portfolio of publicly listed Australian shares would fall into either of these categories, however it is prudent to confirm this.
Thirdly there may be taxes payable in your country of residence and this will partly depend upon the tax treaties between Australia and your country of residence.
Finally, if you choose to hold rather than sell the inherited shares, there may be Australian withholding tax on dividends you receive, depending upon whether they are franked and the double tax agreements between Australia and the country in which you live.
Tax on inherited shares
As a non-resident it does not matter that you acquired shares as a result of inheritance or on market, there is no capital gains tax payable.
In fact I have known specialist practioners in this area to encourage their clients to go and live in tax friendly country such as Singapore, if they are likely to receive a large inheritance.
However if you are an Australian resident for tax purposes, there will be tax implications if you inherit shares.
The inheritance of shares does not itself give rise to a tax liability. However if you receive dividends or dispose of the shares after you have inherited, you will be subject to tax.
How much? This will first depend upon when the shares themselves were purchased. Generally, if the shares were acquired before 20 September 1985, the market value of the shares on the date of death will become the cost base. That means if you subsequently dispose of the shares, you will be subject to capital gains tax on the difference between what you sell the shares for and the value of the shares at the date of death. Your marginal tax rate and the length of time you held the shares after inheritance will determine the tax payable.
If the shares were acquired by the deceased after 20 September 1985, you also inherit the cost base. This means that when you sell the shares you are subject to capital gains tax on the gain under the normal rules with any capital losses first being able to be applied against the gain, the 50% discount then being applicable if the shares were held for more than 12 months, and your marginal tax rate determining the tax payable.
Finally, dividends received after you have inherited will be included as income and taxable at your marginal tax rate.
Depending upon your age and circumstances, if you are an Australian resident, it is always worthwhile considering whether contributing some or all of your inheritance into superannuation by way of in specie transfer. So long as there are not prohibitive capital gains tax implications to do so, and you are not at risk of exceeding the superannuation contribution limits, the ability to have a dividend stream within superannuation with a maximum tax of 15% reducing to 0% if you are in receipt of a superannuation pension and over 60 years of age, with the possibility of any unused franking credits being refunded to your superannuation fund as cash, is very attractive.
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