A "Virtual" Inheritance Tax: CGT and Non-Resident Beneficiaries
Technically, Australia doesn't have an inheritance tax, but if you are the non-resident beneficiary of an Australian estate, there are capital gains tax rules which can have much the same effect as an inheritance tax, and need to be very carefully considered in any estate planning.
In general, if you are the beneficiary of an Australian estate you are taken to have acquired the asset on the day the person died. But CGT is typically not payable in these circumstances - it applies later when you dispose of the asset. However, special rules apply when a beneficiary is non-resident - in that case all assets that are not "taxable Australian property" that pass to a foreign resident through an Australian estate will be subject to CGT.
In effect, for the purposes of the estate, the deceased is deemed to have disposed of the assets that pass to a foreign resident at the date of their death. The value used to calculate the CGT payable is the market value of the assets as at the date of death and any applicable CGT must be recorded in the deceased’s "date of death" tax return and tax paid by the estate. Then, unless the will contains suitable provisions, the tax payable will be deducted from the available estate and in effect all beneficiaries will bear the cost. Consider the example below.
A resident Australian father dies leaving an estate comprising cash of $300,000 and 10,000 BHP shares valued at $320,000 to four children in equal shares; with one of the child beneficiaries non-resident for Australian tax purposes. The shares had been purchased as a single lot in 1989 at a unit price of $10.20 (total cost: $102,000) and therefore a total capital gain exists at death of $218,000.
Because one of the equal four beneficiaries is a non-resident the father will be deemed to have sold 2,500 BHP shares at the the date of death and the estate will be liable for CGT on the capital gain on those shares.
This causes two immediate problems for the resident beneficiaries:
Additionally, the estate's executors are personally liable to ensure that taxes are properly paid in relation to the estate. If they are not aware of the different rules attaching to non-residents they may have a legal liability to repay any foregone tax.
Strategies do exist to address and minimise these consequences. For example, depending on the mix of assets within the estate a testator can choose to bequeath non-CGT assets (such as cash) to non-resident beneficiaries and CGT assets to Australian-resident beneficiaries, or give executors the flexibility to allocate shares in this fashion. Alternatively, the will could provide for a Testamentary Trust to come into existence on the testator's death, for the benefit of any/all non-resident beneficiaries.
Professional advice is absolutely required in these circumstances and expatriates have a duty, even if it is an uncomfortable one, to ensure that testators and/or executors are aware of the CGT provisions.