If you receive shares from a deceased estate, or if you’re planning ahead for the future of your own assets, it’s important to understand the how tax on inherited share portfolios works.
The basics of tax on inherited share portfolios
Any future dividends received by a beneficiary of shares will be treated (and taxed) as normal income. The only exception to this is when a child under 18 receives income via a testamentary trust; this income is taxed at adult rates rather than the usual high rates for minors.
When a beneficiary sells an inherited asset, capital gains tax (CGT) will be applied in the normal way, with slight variations depending on when the shares were inherited and when they were originally purchased by the deceased.
For CGT purposes, shares are considered to be inherited on the day the person dies (not the day they are actually transferred to the name of the beneficiary). If that day was before 20 September 1985, any capital gain or loss from the assets should be disregarded. You won’t have to pay tax on any gain, but you also can’t use any loss as an offset.
Calculating your cost base
The ATO’s rules state that if the shares were originally acquired by the deceased before 20 September 1985, the market value on the day the person died (not the day when you received them) is used as your cost base.
For shares acquired on or after 20 September 1985 by the deceased, the cost base applied is the deceased person’s cost base of the shares on the day the person died, i.e. you inherit their cost base along with their shares.
If the deceased person died before 21 September 1999, the indexation method may be used to calculate CGT.
Shares aren’t always inherited when a person dies; family members may give their shares to relatives while they are still alive. In this case, for shares received as a gift, the cost base will be taken as the market value of the shares on the date that you received them.
Although it’s not always possible to anticipate your death, in some cases measures can be taken to minimise tax on inherited share portfolios ahead of time. These include:
- Crystallising any capital losses and making use of any that have accumulated prior to death, since these cannot be passed on to beneficiaries
- Distributing share portfolios to beneficiaries with lower taxable incomes to minimise the amount of tax paid on future income and capital gains
- For substantial estates with beneficiaries aged under 18, establishing a testamentary trust will grant them access to favourable adult marginal tax rates, thus preserving more of the capital
- If you inherit shares, any dividends paid will be treated as normal income
- When you dispose of the shares, CGT will be applied as normal – with a couple of variations depending on when the shares were originally acquired and when you received them
- Dividends paid from a testamentary trust will be subject to normal adult marginal tax rates – even for minors who usually have to pay higher rates of tax. If you have a valuable estate with beneficiaries under 18, consider establishing a testamentary trust
- Capital losses can’t be passed on to beneficiaries, so try to utilise these before death