Why you should give your assets to your grandparents

I’m sure people who are more tax-savvy than me have been thinking about this for a while, but it just occurred to me.

Unlike virtually all OECD countries, Australia has no inheritance tax, and we do not tax realised capital gains at death. Which means that if you have a share portfolio that you know you plan to hold for a decade, and an trustworthy grandmother who you expect to pass away in about a decade, then you should give your share portfolio to your grandmother. When she passes away a decade later, she wills you the portfolio, and you get its full value, without having to pay any capital gains tax. 

So while American tax planners spend their time trying to work out clever ways of giving away the estate before death, their Australian counterparts are presumably doing the opposite.

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14 Responses to Why you should give your assets to your grandparents

  1. Peter Tucker says:

    A cunning plan, Andrew, to be sure, but you won’t be surprised to know that Peter Costello is ahead of you here. I am happy if someone can show me otherwise, but I am pretty certain that transactions like gifts of shares to family members are caught by what it known in the bowels of the ATO as “the market substitution rule for capital proceeds.” In short, if you gift away assets like this they are deemed to have been disposed at market value, triggering a GST “event.”

    Read it and weep at page 11 here: http://www.ato.gov.au/content/downloads/NAT4151a-06.pdf

  2. Ken Parish says:

    I wouldn’t swear to this not being a tax expert, but I don’t think your suggestion would work. Giving away an asset is a CGT event, and you would be assessed on the real market value of the asset in a non-arm’s length transaction like giving shares to your grandmother. Thus, far from avoiding CGT, you would in fact be crystallising an immediate obligation to pay it by giving the asset to your grannie. Moreover, although your grannie’s estate may not later pay any further CGT on the portfolio on her death, my general understanding is that you would then inherit the asset at a CGT cost base being the market value it had when she first acquired it from you (rather than the value it had when she died). Thus, when you eventually sold the asset in a real market transaction, you would end up paying tax on the entire capital gain between the time you gave it to grannie and the time you actually sold it. It’s just further proof that the old truism about the only certainties being death and taxes is a truism because it’s true!

  3. spog says:

    What Ken said.

  4. Andrew Leigh says:

    Peter/Ken/Spog – I should’ve been clearer. You definitely pay CGT when you give the shares to grannie. But that’s CGT you would’ve paid anyway, so it’s no extra burden. My point was that you can avoid CGT on the capital gains that accrue in the decade while grannie holds the shares. Quoting the Wikipedia article referenced above:

    CGT assets transferred to beneficiaries (either directly or first to an executor) are not treated as disposed of by the deceased, but instead the beneficiaries are taken to have acquired them at the deceased’s date of death and with cost base and reduced cost base as at that date

    As an evidentiary matter, if the ATO could prove that you were the beneficial owner of the shares throughout the period in question, they could get you for the full capital gain. But I don’t see how they’d ever manage to do this.

  5. Jono says:

    Also worth mentioning is the effect of superannuation. If you are close to retirement age, its a good way to divert money into an investment that is subject to much lower tax rates than personal income tax.

    Of course, there is the problem that you have to wait till retirement age to withdraw from superannuation. Some astute observer in today’s Herald Sun commented that young singles now have a massive incentive to marry a much older spouse closer to retirement age so they can make spouse contributions towards the older person’s super fund.

  6. Patrick says:

    Or if you are within 25 years of retirement, buy a house on an interest-only loan, invest the amount you save in your super and pay off the lot from your super when you retire.

    Or, in Peter’s spirit, get your parents to buy the house on those terms whilst you pay them market value rent. Double bonus? They will get a tax deduction for the interest payments, so it will be quite easy to pay them a high enough rent to pay for the super contributions and the (after-tax) cost of the interest.

    Final sweetener – if they salary sacrifice the super contributions from their own salaries, your rent need only cover that portion of their salary they sacrifice (effectively at 15%) instead of the same amount after-tax (at 30, 42, or 46% as the case may be). (although they will pay tax on the rent at that rate – but you can pay the rent to the lower earning spouse while the higher earner makes the salary-sacrifices)

    don’t try that without advice!

  7. Patrick says:

    Also, KP is right that it doesn’t work because you inherit the cost base you originally had. So you will pay that tax.

    No-one in their right mind would do it anyway, for the same reason that I am not a family lawyer:

    What happens when cousin Prick decides he wants some of your share portfolio and sues the estate? Or if granma forgets to have witnessed the will?

    So even if it did work it would be a very high-risk play for the gain, remembering that CGT in such circumstances is max 23.75% for individuals with no outstanding higher education debts.

  8. Andrew Leigh says:

    “KP is right that it doesn’t work because you inherit the cost base you originally had”

    Why should this be the case? In my example, you paid CGT when you gave away the assets. They were then owned by grannie for 10 years. Grannie would have paid CGT if she’d given them back to you anytime before her death, but at her death, the CGT bill disappears.

  9. Ken Parish says:

    “but at her death, the CGT bill disappears.”

    No it doesn’t, it is just deferred until the beneficiary sells the asset. The key lies in understanding the way in which the ATO calculates the cost base of an asset. With inheritance (and usually also with acquisition of an asset from a former spouse as part of a family law settlement), the cost base is the price/value at which the asset was originally acquired by the deceased (or by the former spouse who legally owned the asset until it was transferred in the FL settlement). Thus the CGT “exemption” for transfer of assets in a deceased estate (and in a family law settlement) isn’t really an exemption at all; it’s just a deferral of liability.

  10. Ken Parish says:

    In other words, I think this part of the Wikipedia article you quote is simply wrong:

    “and with cost base and reduced cost base as at that date” …

    However, as I disclaimed at the outset, I’m not a tax expert so it might be me who’s wrong. Anyway, I’d certainly strongly urge anyone contemplating such a thing to consult a tax expert first, and not rely on Andrew, me, Spog, Patrick or Wikipedia!!! Patrick’s practical warnings about the danger of gran’s will being challenged (or gran forgetting to make one or making an invalid one) are apposite too.

  11. Andrew Leigh says:

    KP, I don’t think the Wikipedia entry is wrong. It’s quite consistent with the ATO website:

    Disregarding capital gain or loss on death
    There is a general rule that CGT applies to any change of ownership of a CGT asset, unless the asset was acquired before 20 September 1985 (pre-CGT).
    There is a special rule that allows any capital gain or capital loss made on a post-CGT asset to be disregarded if, when a person dies, an asset they owned passes:
    – to their legal personal representative or to a beneficiary, or
    – from their legal personal representative to a beneficiary.

    Your points about the practicalities of Gran’s trustworthiness are apposite, but I’m more interested in first nailing the legal issue. Perversely, I still think I’m right.

  12. Patrick says:

    Andrew, I echo Ken’s warnings first.

    But in respect of the cost base, the first element of a beneficiary’s cost base is ‘the cost base of the asset on the day you died’ (see subsection 128-15 (4); ‘you’ must be taken to refer only to the legator and not the beneficiary, I presume).

    Since there have been no capital proceeds, the cost base at the time of death is, in your example, the legator’s cost base plus any costs she has incurred over the time since your gift.

    Ergo no advantage, and transaction costs and extraordinary risks without commensurate returns.

  13. Bruce Bradbury says:

    Also, don’t forget that your granny might lose her age pension if her assets are too high.

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