The parents paid all expenses relating to the home, including the loan repayments, eventually selling the NSW property to pay off the loan. The parents also spent a lot of their money improving their other home. Their wills made specific bequeaths of certain assets to particular beneficiaries, but the residual estate was to be split equally between their four children.
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The capital gains tax on this property is significant because the property was purchased before August 20, 1991, so holding costs such as interest, rates and insurance cannot be included in the cost base.
It was 1991 when the government realised how inequitable this was: that a property could cost a person, in total, more than the sale proceeds, yet they would have to pay CGT on an imaginary gain created by poorly drafted legislation.
When the law was changed, it only applied to properties purchased after that date. Taxpayers were still trying to get their head around this very new law, not realising how far it reached into family arrangements, just a general understanding that the family home would not be subject to CGT.
It gets even worse because the parents paid for the improvements to the house – the cost of those cannot be included in the cost base of the CGT calculation because the “owner” (according to the ATO) did not pay for them.
After selling the house for $1 million, the capital gain comes out to $425,000, and the daughter will be left with a tax bill just shy of $200,000. With each child getting 25 per cent of the sale proceeds. This will leave the daughter an inheritance of only $50,250 after she pays the tax.
The ATO certainly received a lot more of her parents’ estate than the daughter. She was really quite lucky that the tax bill did not exceed her inheritance.
The ATO has declined to comment as it does not discuss individual taxpayer’s affairs.
Julia Hartman founded BAN TACS Accountants more than 30 years ago and is still passionate about all things tax.