My name is Lisa Lark. I read the article titled "Do the sums before bequeathing shares to your children" appearing in the Age on Wednesday, June 28, 2017. I was hoping to ask a specific question in relation to the article, being:
My son inherited shares from my aunt under a testamentary trust. She died 5 May 2008. He was entitled to receive the shares on his 25th birthday, namely 8 July 2017. He holds duel citizenship -both Australian (where he was born) and USA (his father being an American by birth). He was a resident of Australia when my aunt died, but is currently residing in the USA. Does the transfer of the shares into his name attract GST now in the USA?
The testamentary trust will not vest until my daughter turns 25 on December 2020. Should my son leave the shares in the trust and not transfer them into his name until the vesting date of the trust, upon which time he probably will be a resident of Australia again?
Hopefully you may know the answer, although I appreciate that it does not deal with Australian tax law alone.
Thank you for your attention to this matter.
Quite a challenging question. Fortunately, the main area of concern is Australian tax law so I can answer a lot of it but I canâ€™t tell you anything about US tax law. The full answer also relies on the individual wording of the testamentary trust deed. Initially I consider refunding you question because I canâ€™t cover all of it but I considered your position, it is going to be difficult to find anyone to give you the whole picture. So, I decided to answer what I can and give you clear guidelines on the other questions you need to ask. I hope you consider this worthwhile.
The first problem is not knowing what the trust deed says about your sonâ€™s options because your idea of delaying receiving the shares is a very good one. So you need to ask a solicitor, preferably the one that drew up the testamentary trust deed, when your son became presently entitled to the shares and if there is any room to delay that event. We are looking at presently entitled according to the ATOâ€™s world view. Here is a link to their ruling on it, TR 2004/D25. This should help the solicitor.
You might like to also confirm with the solicitor that this is truly a testamentary trust ie the estate is still open, the estate has not been wound up and a trust set up separately from the estate.
Now based on the assumption that this is truly a testamentary trust then the shares are still in the estate. So it is all a question of when the shares do pass to your son. If he is a non resident when this happens CGT event K3 will be triggered and it will be the estate that has to pay CGT on the shares. So it is all a question of when he becomes presently entitled. If he is a resident of Australia for tax purpose when he becomes presently entitled then the estate does not pay any tax on the transfer but the CGT liability moves across with the shares so if he does sell them he will have to pay all the CGT. It may even be a better outcome for the estate to pay the CGT if it is in a position to qualify for the 19% tax bracket.
So if the solicitor tells you your son was presently entitled when he turned 25 then the estate pays the CGT (event K3) and he inherits the shares with no current tax liability. If there is an inheritance tax in the US then maybe there is tax to pay. Certainly, while he is a resident of the US for tax purposes, the US has a right to tax his dividend income and he will not be entitled to a refund of the franking credit. If US tax law is anything like ours the US will want to tax any notional capital gain made on the shares when he leaves to return to Australia to live. Australia will ignore the shares until he becomes a resident of Australia for tax purposes at which time the ATO will deem him to have reacquired the shares at market value on the day he comes back and the CGT clock will start ticking from then.
If the solicitor tells you he can delay being presently entitled to the shares until he becomes a resident for tax purposes then CGT event K3 does not happen. He is entitled to the rollover under section 128-15 ITAA 1997 http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s128.15.html There is a table in this section which explains what his cost base is. If they were pre 1985 shares to his aunt then he inherits them with a cost base of market value when she died. If they were post 1985 shares then his cost base is whatever her cost base was. If he becomes a non resident for tax purposes again then he has a choice of paying CGT on the market value when he leaves the country to take the CGT out of Australiaâ€™s grasp. If he doesnâ€™t then Australia will continue to have a right to tax any Capital gain made while he is away but he wonâ€™t have to pay the CGT until he actually sells the shares.