Tax agenda 2013
How to minimise exposure to one of life’s two certainties
Death and taxes are two of life’s certainties yet are often overlooked by high net worth Australians when developing overseas business and investment structures. This is no doubt partly due to the absence within Australia of any ‘official’ inheritance or death taxes. However many countries in which Australians invest and conduct business do impose inheritance and gift taxes. As such, it is imperative to take these taxes into account when developing appropriate structures for assets in those countries.
In Australia, the most common situation where death can trigger immediate tax liabilities is where superannuation benefits are passed to the deceased’s adult children. In this case, tax at the rate of 16.5% is payable on the benefit (excluding any personal non-deductible contribution component). Other examples where immediate tax liabilities can arise on death include situations where the terms of a discretionary trust deed cause it to vest on the death of the individual, or where certain CGT assets are passed to non-resident beneficiaries, charities or superannuation funds.
In most cases, these tax costs can be mitigated with appropriate planning such as appointing a superannuation power of attorney, amending trust deeds or making bequests more asset/beneficiary specific.
The importance of taking foreign inheritance taxes into account when developing business and investment structures can be illustrated by the following scenario. An Australian individual investor acquires residential property investments in the United States of America (US) to take advantage of an improving US property market and a strong, but likely declining, Australian dollar. The optimum income tax position is likely to be achieved by holding the interests in the US property (or US property holding entities) in the individual’s own name or via an Australian trust or self managed superannuation fund (SMSF) (e.g. to access concessional US income tax rates on future capital gains). However, in the event of the death of the Australian individual investor, these structures may well result in US inheritance tax liabilities of 40% of the value of the assets!
Solutions to this issue vary. In some cases, this may be as simple as ensuring the ‘net value’ of the asset is significantly reduced by appropriately linking debt to the asset. In other circumstances, a more advanced structure may be warranted.
As many countries have far reaching inheritance tax laws and with people and capital becoming increasingly mobile, EY has released an International Inheritance and Gift Tax Guide. The publication is designed to enable internationally positioned individuals to quickly identify the estate and inheritance tax rules, practices and approaches of 36 common business and investment jurisdictions. To access the guide, click here.