Badal and his brother Kumar have inherited a lot of shares in their father’s estate and, on legal advice, came to see accountant GAIL FREEMAN for tax guidance.

BROTHERS Badal and Kumar came to see me, uncertain about whether it was better to sell the shares from their father’s estate now or transfer them to their self-managed superannuation fund (SMSF).

Kumar said the brothers were uncertain about whether it was better to sell the shares now or transfer them to their self-managed superannuation fund (SMSF).

I looked over their lawyer’s quick calculation and said: “It appears as if the shares cost $500,000 and the profit looks to be $300,000. 

“I’ll look at the capital gains tax issues first then the tax issues and lastly the SMSF issues. 

“On your father’s death, the shares went to the estate and then to you as the beneficiaries. If your father bought the shares before the introduction of capital gains tax, that is before September 20, 1985, then they pass to you at the market value at the date of his death. 

“If he bought them after this date they pass to you at the price he paid for them including brokerage and other on-costs. If the shares are bonus shares they attach to the original shares and have a nil cost base. So, for example, if he bought 5000 shares for $10,000 and he received a bonus of 1000 shares he now holds 6000 shares with a deemed cost of $10,000 and this is treated as one parcel of shares. 

“This is different to a rights issue where you pay the advertised cost for the rights and you would now have two parcels of shares for capital gains tax calculations. Similarly, if he was in a dividend reinvestment plan, which results in additional parcels of shares, each one has its own price and its own capital gain.”

I then turned to the tax position. 

“The shares that have been owned for more than 12 months, which in this case is all of them, are subject to a 50 per cent discount on the tax payable,” I said.

“If they are sold in the estate instead of by you as individuals, there will be no Medicare levy payable by the estate. I have calculated that if there is no discount, the likely tax is $105,000. If you transfer the shares from the estate to yourselves taking into account your other income, the tax payable could be about $63,470 each. So, obviously, you would pay less tax in the estate.

“Finally, you may be able to transfer the shares to the SMSF, but that will be messy. As the tax differential is so great I recommend you sell the shares in the estate, pay the tax there and when you receive the funds personally you can then invest them in your SMSF in different companies, which may provide better returns for you both. 

“From a tax perspective you can each contribute $330,000 to your SMSF as a non concessional contribution over a three-year period and you do not receive a tax deduction. The advantage of this approach is that you will be making tax-free contributions so that if they pass on to other than your spouses they will not be subject to 17 per cent tax on your deaths.”

Badal said he had no idea this was so complex and left my office with options to solve the problem.

If you need help on the tax benefits of receiving funds from a deceased estate contact the friendly team at Gail Freeman on 6295 2844, email info@gailfreeman.com.au or visit gailfreeman.com.au

Disclaimer
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser.