Ask Ban Tacs Question
My father died recently and I am helping Mum to decide whether to wind up the family Trust.
I am a beneficiary of the Trust and per her will would receive one-third of its assets when she dies. For simplicity, let’s assume I inherit it all.
The Trust and its assets are in New Zealand. I am an Australian tax resident.
One consideration is whether I would need to pay Australian tax if a receive a distribution from the Trust when Mum passes, as part of my share of her estate. The family home is in the Trust with a book value of c. $200k vs its market value of c. $1.5m – i.e. there is a large capital gain looming.
My read of the ATO rules is that when I receive the distribution, the capital gain of $1.3m would be treated as assessable income and I would pay tax on it at my marginal tax rate. Is that correct, or is it treated differently if it has come to me as part of a deceased estate? Is there a legal way in which I could receive my share of the Trust assets tax free?
Presumably, if Mum collapses the Trust and the assets are held in her name, I would pay no tax on my inheritance?
Thank you
Answer
Generally the words Family trust describe a discretionary trust where no beneficiary has a fixed right until the trustee makes a distribution each year. My answer is based on this.
Certainly you have a very very valid point regarding the family home. I just wonder what the NZ tax consequences are to your mother of transferring it out.
If your mother can afford the tax (if any in NZ) it is certainly worth transferring the family home out of that trust. From Australia’s point of view because it is held in a trust it doesn’t get any of the main resident tax concessions. If on the other hand it is transferred into your Mum’s name and your Mum dies, you will inherit the home with a cost base of market value at the date of her death with no CGT to pay if sold within 2 years. Exit the $1.3mil problem. And you are right you would have a $1.3mil problem if it is left in the trust.
Your question implies there are other assets in the trust. As your mother controls the trust and she is an NZ resident then the trust is a resident of NZ. Australia gets to tax your worldwide income but that would only come about when a distribution is made to you. The trust is a separate asset from you mother and does not die. As it is a discretionary trust she cannot even leave her rights to the trust to you in her will because she has no real rights.
So really it boils down to whether you would decide to wind up the trust upon her death. At that point in time the trustee would have to look for people to distribute the income and capital gains to. This could be you and then yes the ATO can pounce. If you mother winds it up before she dies she will probably have to pay tax on all that income and capital gains and that is a question for an NZ Accountant. Then she can pass assets to you through her will and you will inherit them with the same cost base as she had which maybe pretty close to their market value anyway as really she only acquired them when the trust was wound up. Upon your mother’s death, if these assets have already been transferred to your mother, the ATO would not tax the transfer of the assets to you just the income they may earn you or capital gain when you sell. If the situation was reversed the ATO would be taxing those inherited assets (other than Australian real estate) as they left the country so you need to check what the NZ laws are in that regard.
If instead the trust is in place when your mother dies and then you decide to close it down as said above there is probably a lot of capital gain that you will be taxed on because your mother has not stepped it up to market value by taking them on as her assets. You still won’t be taxed on the original cost of the asset to the trust.
I hope this makes sense. I will try and explain from another angle. The trust’s original cost is probably going to be lower because it goes way back so the capital gain is higher. Whereas if the trust transfers all the assets out to your mother before she dies her original cost will be market value at the time of transfer, that is your cost base so a smaller capital gain to you but in the meantime you mother may have had to pay CGT in NZ.
I know there are a lot of things in NZ that are not subject to CGT so get advice from a NZ accountant. You may find winding up the trust and transferring to your mother before death will not be taxed much at all and well worth it to give you an uplift to market value. Regardless getting the family home out before death is a must do.
