CGT Event K3: Inheriting shares as an Australian Expat

Understanding CGT Event K3 for Australian Expats living abroad, as it can have significant tax implications for you and other beneficiaries when receiving an inheritance from someone who has passed away in Australia.

In this blog post, we’ll break down what CGT Event K3 is, how it affects you as an Australian Expat, and offer strategies for managing it.

What is CGT Event K3?

CGT Event K3 is a Capital Gains Tax (CGT) event that applies when certain assets pass to a ‘tax-advantaged entity’ upon the death of an individual residing in Australia.

The definition of ‘tax advantaged entity’ can include a foreign resident, a charitable entity, or the trustee of a super fund. This blog will focus on assets passing to a foreign resident beneficiary, which means a non-resident for tax purposes of Australia, such as an Australian Expat.

When does CGT Event K3 occur?

CGT event K3 occurs when a non-resident for tax purposes inherits a CGT asset that is not classified as "Taxable Australian Property" (TAP). CGT assets that are not classified as TAP include shares, units in a unit trust or other listed investments, but generally do not include real property.

As a result, the deceased estate is considered to have triggered a CGT event, which can either result in an immediate estate tax liability or cause a potential capital loss to be permanently forfeited.

The deceased individual will be treated as though they had disposed of the asset to the beneficiary just prior to death. There is a capital gain if the market value of the asset on the date of death exceeds the deceased’s cost base of the asset. There is a capital loss if the market value exceeds the reduced cost base of the asset. The trustee of the deceased estate must include any net capital gain in the date of death tax return.

CGT event K3 occurs in the financial year in which the individual passes away and is recorded in the deceased’s final tax return. The legal personal representative or trustee of the deceased's estate will be responsible for lodging the date of death return.

If a CGT asset was acquired by the deceased prior to 20 September 1985, any capital gain or capital loss under CGT event K3 is disregarded.

How does this impact Aussie Expats?

Because Australian Expats are often treated as non-residents for tax purposes, they are captured by the rules of CGT event K3. When CGT event K3 is triggered, the deceased's estate will be liable to pay the tax on any unrealised capital gains on a CGT asset transferred to a non-resident beneficiary.

Where there are both Australian resident and non-resident beneficiaries, CGT event K3 can result in the deceased estate (i.e. the beneficiaries of the estate’s assets) being liable for capital gains taxes that could have been significantly reduced or avoided altogether through strategic asset distribution via a well thought out estate plan.

Example

Edward is an Australian resident and passed away, leaving an estate of Cash ($300K) and listed Shares ($600K). The listed Shares were purchased by Edward over 20 Years ago for $300K, and therefore an ‘unrealised’ capital gain of 300k is attributable to those shares when sold.

Edward’s beneficiaries are his three sons, two of whom are Australian residents and the third is a non-resident living in Singapore. Edwards chooses to distribute his assets equally to each of his three sons. Because the third son is a non-resident, CGT event K3 is triggered on the distribution of those shares ($200K).

As a result, the deceased's estate is required to pay $23,500 in CGT on the capital gain ($100K), reducing each son’s inheritance by $7,833. CGT that could have otherwise been mitigated or postponed.

A more tax effective way to distribute the assets would have been to transfer $300k in shares to each son in Australia, and $300k in cash be distributed to the son in Singapore. While consideration needs to be given to the unrealised gain and future CGT liability on the shares inherited by the resident sons, this would have resulted in no CGT payable by the estate.

How Can Expats plan for CGT Event K3?

Australian Expats can prepare for CGT event K3 by starting a discussion with their parents, siblings, and other family members about estate planning. Seek professional advice from an Australian solicitor about inheritances and the inclusion of clauses in a will that may help to mitigate the tax consequences.

A way to negate the impact that a CGT event K3 has on an estate is to insert a clause into the will specifying that any tax payable as a result of K3 is to be borne entirely by the beneficiary who triggered it (instead of by the estate, which means all of its beneficiaries).

CGT can also be reduced by strategically gifting assets that are not subject to CGT event K3 to those living abroad, such as Cash or real estate, with those living in Australia receiving assets such as Shares or other listed investments.

Final Thoughts

Managing CGT Event K3 as an Australian Expat can seem daunting at first, but with the right strategies and professional guidance, it’s possible to minimise future tax obligations.

Runway Wealth Management is the trusted Financial Adviser to the Australian Expat community. Our tailored advice is backed by expertise, education and experience, which allows us to be at the forefront of Australian Expat Financial Planning.

If you would like to speak to one of our Expat Financial Advisers about this blog or if you have other queries, we would be more than happy to speak with you. Feel free to send us an enquiry through the ‘Contact Us’ tab provided in the below link:

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General Advice Disclaimer: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.