Chris Holloway

While Australians are generous with their money while they are alive, they are missing the opportunity to keep on giving when they have passed away, sometimes even leaving their inheritance accompanied with a large tax bill.

Chris Holloway, Senior Manager Taxation Services, highlights the lasting benefits Australians can leave to beneficiaries by setting up a charitable trust.

“For those looking for a way to give back to the community, a charitable trust could be the answer, where the money is invested for you, and you choose where you would like the money to be donated across the community.”

“This way a person can donate money that continues to exist and grow well after their death.  While the capital can remain stable but more likely grow, much of the income that is earned can be distributed to the charitable cause the client feels deeply committed to.”

“For example, consider the Archibald Prize which supports artists in Australia or even the Viertel Charitable Foundation which supports medical research, and other, charitable objectives,” Mr Holloway says.

Why choose a charitable trust structure?

“While a charitable trust structure might seem like something for the wealthy, it is more achievable than you might think, and certainly practical and accessible for those on the average wage,” he explains.

However, the tax expert points out there are some tax events for those who are creating a trust, that they need to be wary of through the estate planning process.

“While Australia officially removed death duties in 1979, there are a number of hidden taxes that good estate planners need to be weary of, including CGT K3 events. CGT event K3 is a tax on unrealised capital gains on assets that pass from an estate to a tax exempt entity, which includes testamentary charitable trusts.”

According to Mr Holloway, the main differences charitable trusts have with other types of trusts are:

1. In most instances, the “rule against perpetuities” does not apply to them, so they may exist forever.
2. They are trusts for charitable purposes only and therefore there are no specifically named beneficiaries.
3. They are heavily controlled by the courts and legislation.
4. There are significant tax concessions.

“CGT event K3 doesn’t apply where the tax-exempt beneficiary is a deductible gift recipients (DGR) charity. It is important to note that while the beneficiaries of a testamentary charitable trust may be deductible gift recipients (DGR) charities, for tax purposes, it is the charitable trust itself that is seen as the beneficiary of the estate, hence CGT event K3 may apply” says Mr Holloway.

Importance of planning when creating a charitable trust

Establishing a charitable trust involves several steps, including defining the trust’s purpose, selecting trustees, and registering it with the relevant authorities.

It is advisable to seek legal and financial advice to ensure compliance with all regulatory requirements and to maximise the benefits of the trust.

Mr Holloway notes that all charitable trusts must be registered with the Australian Charities and Not-for-profit Commission (ACNC) to apply for charity tax concessions from the Australian Taxation Office (ATO).

He also explains the importance of planning when it comes to passing on assets in a charitable trust.

“When it comes to setting up a will, it is important to consider what assets the trust is passing on, before choosing which trust structure is right for you,” Mr Holloway explains.

“We had a former client who passed away with around $2,000,000 in shares which she purchased in the 1990s. If she were to put this into a charitable trust it would have triggered a Capital Gains Tax (CGT) K3 event, and it would have been a large tax bill for the estate, and hence reduce the amount inherited by the charitable trust.

“However, we were able to set up a sub fund through the Equity Trustee Charitable Foundation – which is a deductible gift recipient – and her shares were passed on tax free,” he concludes.

Leaving surplus assets to benefit the community is a rewarding and equitable thing to do and with the right advice can create a very positive impact.

The post Why set up an ongoing charitable trust rather than a regular trust before you die? appeared first on AdviserVoice.

Chris Holloway

While it might be widely known that selling the family home is capital gain tax (CGT) exempt, this might not be the case after you die – and your next of kin could potentially be facing a large tax burden.

Australia officially abolished death duties in 1979, but Equity Trustees Senior Manager Tax, Chris Holloway, explains it is a misconception that the main residence is also CGT tax exempt.

“If you or I sell our house that we live in there’s no tax. But if the main residence falls into an estate, that suddenly becomes conditional,” he notes.

“When it comes to passing on the family home, there needs to be a plan to ensure the next of kin doesn’t end up with a large tax bill. Part of this is knowing the purchase date of the property and the rules surrounding CGT.”

​Mr Holloway explains that taxes for a house are based on the rules instated on 20 September 1985. If the deceased purchased the property before September 20, 1985, but you inherited it after this date, you generally have two years to sell the property if you want to qualify for the CGT exemption.

​He notes there are some exemptions allowing next of kin to sell the property without facing a large tax burden. The main residence CGT exemption applies if:

1. the dwelling was the deceased’s main residence just before death, and was not being used to produce income, and
2. the dwelling was sold and settled within two years of the person’s death (can be longer with Australian Tax Office discretion), or
3. from the deceased’s death until disposal, the dwelling is not used to produce income and is the main residence of one or more of:
   • the spouse of the deceased immediately before the deceased’s death,
   • an individual who had a right to occupy the dwelling under the deceased’s will, and
   • a beneficiary, if disposing of the dwelling as a beneficiary.

Accordingly, “a will is key with respect to this,” he says.​

Mr Holloway also warns home owners to make sure they track how they are using the property, as in some cases a partial CGT exemption can be applied.

“If the inherited property does not meet the criteria for a full exemption, a partial exemption may apply. This is determined by considering the time the property was used as the main residence versus other uses.”

Key factors that determine this include the deceased ownership period, and next of kin’s use.

“Despite the perceptions, main residence is not automatically CGT tax exempt. It is important to know the tax rules or speak to an industry expert who can help guide you through the nuances of main residence CGT exemptions,” concludes Mr Holloway.

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Chris Holloway

Superannuation is widely known as the most tax effective way to build wealth, but Equity Trustees warns estate planners to investigate the tax status of those receiving an inheritance via superannuation.

Equity Trustees Senior Manager Tax, Chris Holloway said while superannuation may be one of the most tax effective ways to save while you’re alive, there will be some tax pitfalls for certain beneficiaries after you die.

“If you or I were to withdraw our super after we turn 60 it is tax free, but it might not be the same case for your intended beneficiaries if it ends up being part of an estate” Mr Holloway said.

The tax specialist went onto explain that superannuation is treated differently depending on whether your super is paid as a lump sum, income stream or a mixture of both, and if your beneficiary or beneficiaries are classified as ‘tax-dependants’.

A tax-dependant includes:

• a current spouse, including a de facto relationship
• any children of the deceased who are under the age of 18
• those in an interdependency relationship with the deceased.

Mr Holloway explained if you’re a tax-dependent then you won’t pay any tax on the superannuation payment.

However, if you’re a non-dependent and a superannuation beneficiary, for example a child of the deceased who is over 18, the tax treatment of these funds is broken into the following elements:​

“This is the maximum rate so if you’re a tax non-dependant and you receive a death benefit and you’re on a higher than 30% tax rate, you will actually receive an offset,” Mr Holloway said.

“If a superannuation death benefit gets paid into a deceased estate, the tax return is prepared as if no beneficiary was entitled and if there are non-dependent beneficiaries, the resulting tax is a debt of the estate,” he continued.

“Superannuation dependents, such as adult children, current spouses, current children, or people with an interdependent relationship with the deceased, can directly receive a superannuation death benefit.”

Mr Holloway also warned that proving an interdependency relationship can be a difficult task. Adult next of kin who are helping out their parents during their life must make sure they keep track of expenses, as verification will be needed to prove interdependency to avoid a hefty tax bill.

“Interdependency and tax are interesting issues. We recently had a case where two adult children were caring for their father. Unfortunately, the two children didn’t keep the receipts, so the ATO didn’t proceed with their interdependency application as there was no proof of this type of relationship. While they received the funds, they still had to pay tax on the proceeds,” Mr Holloway explained.

Finally, the tax expert warned that superannuation is not automatically included in a deceased’s will and people need to give specific instructions for this to occur. Otherwise the super fund’s trustees may decide who receives the superannuation payout.

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