When settling litigation concerning an estate, it is crucial to consider the tax implications that may arise from any resolution. This is particularly so where offshore parties are involved.
Being aware of the potential tax ramifications before entering into mediation or any other settlement process is crucial, as the tax consequences, if not understood, could derail a settlement or result in unintended consequences to one or more parties.
Capital Gains Tax (CGT) Implications for Non-Resident Parties
Where non-resident persons are involved in an estate or a proceeding, or if the deceased held Australian assets but was not an Australian resident for tax purposes, the usual CGT rules may not apply.
CGT Discount for Assets Held More Than 12 Months
By way of illustration, one of the more well-known points of taxation relief is the 50% CGT discount.
Generally, if an asset, let’s say, a piece of property, has been held for more than 12 months, the property owner may be eligible for a 50% CGT discount (CGT discount). However, changes made to the law, effective as of 8 May 2012 operate to deny foreign residents access to the CGT discount.
This change may affect the amount of tax the estate will need to pay upon the disposal of the asset owned by a deceased non-resident, which, in turn, may impact the pool of funds available for distribution to beneficiaries or litigants.
Partial exemptions and distributions to non-resident beneficiaries
Where the non-resident deceased was a resident at some point prior to death, or where the executors are residents for tax purposes and have held the property for a period after death, then a partial CGT exemption may be applicable and reduce the overall tax burden.
It should also be noted that under CGT event K3, the executors of the estate will be liable to pay tax at the top marginal rate on any capital gain realised from the sale of assets distributable to non-resident beneficiaries (unless the will states otherwise). This should also be taken into account in the overall settlement of any dispute.
Seeking a Private Ruling for CGT Discount
In cases where the executors are not entitled to the full 50% CGT discount, or are only eligible for a partial discount, they may consider applying to the ATO for a private ruling. A private ruling could potentially allow s.99 Income Tax Assessment Act 1936 to apply so that the full 50% CGT discount is available to the estate. If a private ruling were successfully obtained, the asset pool which might be available for division between the parties involved in the dispute may significantly increase.
The Importance of Accounting and Tax Advice in Setting Litigation Disputes
Unfortunately, many parties engage in mediation or informal settlement discussions without consulting the appropriate accounting or tax professionals. This can result in derailed mediations or settlement terms that do not adequately reflect the intended outcome. To avoid this, it is critical to be informed of relevant issues, or obtain proper tax and accounting advice, before proceeding with any settlement negotiations. This is particularly so where non-residents (living or deceased) are involved in, or are affected by, the proceedings.
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