Avoiding the gift tax trap

Generally, a gift of money or assets from an individual is not taxed if the gift is given voluntarily, and nothing is expected in return. However, there are some circumstances where taxes may apply.

Gifts from a foreign trust

If you are a tax resident of Australia and the beneficiary of a foreign trust, it’s possible that at least some of the amounts paid to you (or applied for your benefit) will need to be declared in your income tax return. This applies even if you were not the direct beneficiary of the foreign trust, for example, a family member received money from a foreign trust and then gifted it to you. This applies to cash, loans, land, shares, etc.

Inheritances

Money or property you inherit from a deceased estate is often not taxed. However, there are circumstances where capital gains tax (CGT) might apply when you dispose of an asset you inherited. For example, if you inherit your parents’ house, CGT generally does not apply if:

• The property was their main residence; and
• Your parents are Australian residents for tax purposes; and
• You sell the property within 2 years.

However, CGT is likely to apply if, for example:

• You sell your parents former main residence more than 2 years after you inherit it; or
• The property you inherit was not your parents’ main residence; or
• Your parents were not Australian tax residents at the time of their death.

Managing all possible tax consequences of an inheritance can become complex very quickly. It’s very important to contact us for assistance when planning your estate. This is important to ensure that you maximise the outcome for your beneficiaries (your loved ones), and for managing the tax implications of any inheritance.

These issues should always be considered if you are drafting or updating a Will.

Gifting an asset does not avoid tax

Donating or gifting an asset does not avoid CGT. If you receive nothing or less than the market value of the asset, be careful as the market value substitution rule might come into play. The market value substitution rule can treat you as having received the market value of the asset you donated or gifted when calculating any CGT liability.

Let’s have a look at the following example.

If Mum & Dad buy a block of land then eventually gift the block of land to their daughter, the ATO will look at the value of the land at the point they gifted it. If the market value of the land is higher than the amount that Mum & Dad paid for it, then this would normally trigger a CGT liability. It does not matter that Mum & Dad did not receive any money for the land. Mum & Dad might have a CGT bill for land they gifted with nothing in return.

As you can see, a simple gift or gesture to a loved one, can have taxation implications. It is recommended to discuss any thoughts or ideas with us prior to taking action. The possible taxation implications can be costly.