Disclaimer: The following is for informational purposes only. It is not intended to constitute legal advice, or to recommend a course of action, and does not create an attorney-client relationship between the reader and Renuka Somers, or Somers Tax Law, PLLC.
The U.S. and Australian tax issues for U.S. Persons who are beneficiaries of an Australian estate – as both Australian residents and nonresidents, are summarized below.
Note: These rules referred to in this blog are complex and are simplified for discussion purposes.
Table 1: Assets held by the Decedent
| Australian Decedent’s Assets | Potential Australian Tax implications | Potential U.S. Tax implications | ||
| Australian resident Beneficiary | U.S. Resident Beneficiary (Nonresident of Australia) | Australian resident Beneficiary
(Non-U.S. Person) |
U.S. Person | |
| Australian Real Estate: Decedent’s Primary residence
Taxable Australian Property (“TAP”) Asset |
Exempt from Australian capital gains tax (“CGT”) if the decedent qualified for the main residence exemption and the property is sold by the executor or beneficiary within 2 years of the death. | N/a unless U.S. Person 🡪 | Beneficiary inherits the asset at the fair market value (“FMV”) of the property on the decedent’s date of death – Beneficiary receives assets with a ‘step up’ in basis. | |
| Australian Real Estate: Decedent’s Investment property
Taxable Australian Property (“TAP”) Asset |
Beneficiary inherits at decedent’s cost base.
Can access the 50% CGT discount. |
Beneficiary inherits at decedent’s cost base.
🚩 No 50% CGT discount for nonresidents on an eventual sale by them. |
||
| Stock portfolio:
*Australian or foreign stock s.108-5 ITAA 1997 definition of “CGT asset” does not distinguish between Australian and foreign portfolios. “Non-TAP” asset (unless a direct or indirect interest in Australian real property). |
Inherits at decedent’s cost base and can apply 50% CGT discount on an eventual sale.
Australian resident beneficiaries inherit the asset with the unrealized gains. |
🚩 CGT Event K3 is triggered.
K3 happens just before the decedent’s death, so the consequent capital gain or loss applies to the deceased taxpayer rather than the estate and the capital gain or loss is included in the deceased’s final income tax return. Special rules apply with respect to pre-CGT assets. All beneficiaries (or the estate) may bear the effects of the tax. No CGT in Australia on subsequent disposal of non-TAP assets by nonresident. |
||
| Superannuation: | Distributions to tax-dependents are tax-free (income stream or lump sum).
Distributions to non-tax dependent: Can only be lump sum distributions. Subject to tax on the taxable component of the benefit at 15% for the taxed element; 30% for any untaxed element; plus 2% Medicare levy. Any tax-free component is not subject to tax. |
🚩 Death benefit distributions may be taxable in the U.S. | ||
| Life Insurance payouts: | Lump sum proceeds are generally not assessable.
🚩 If held in super: Tax free if lump sum death payment to death benefits dependent. May be subject to tax on the taxable component of the benefit at 15% for the taxed element; 30% for any untaxed element if fund has deducted the costs; plus 2% Medicare levy. |
N/a unless U.S. Person 🡪 | Life insurance proceeds are generally not taxable to the beneficiary.
🚩 However, is the distribution a “Death benefit distribution”? |
|
Table 2: Succession planning -privately held businesses and Australian Trusts
| Decedent’s Assets / Role | Australian Tax implications | U.S. Tax implications | |||
| Australian resident* | U.S. Resident | Australian resident* | U.S. Citizen/Resident | ||
| Privately held company shares: | Tax deferred until shares are sold by beneficiary, or unrealized gains are realized and dividends are paid to shareholders. | 🚩 Are the shares TAP or Non-TAP assets (CGT Event K3)? See Table 1 above.
🚩 Residency: What is the residency of the directors and shareholders – where is the central management and control of the company? 🚩 Change of control of corporate trustee: Who controls the trust? Trust residency? |
N/a unless U.S. Person 🡪 | Generally, beneficiary inherits shares at FMV at decedent’s date of death, receiving a ‘step up’ in basis: i.e. at “market value cost base”.
🚩 Additional considerations: What is the nature of the beneficiary’s interest? 🚩CFC (Controlled Foreign Corporation)? Are more than 50% of the vote or value of the company owned by U.S. shareholders, each of whom also owns at least 10%? IRS reporting obligations apply. 🚩PFIC (Passive Foreign Investment Company)? Is at least 75% of the company’s gross income derived from investments or sources unrelated to regular business operations? OR Are at least 50% of the foreign company’s assets, income producing investments earning interest, dividends, capital gains, distributions? 🚩 Does the company own managed investments? 🚩 Is the company a corporate beneficiary (“bucket company”) of an Australian trust? IRS reporting, tax obligations, and penalties may apply. See PFIC reporting. 🚩 There is no step-up in basis on PFIC inherited shares. 🚩Grantor Trust Rules: Has the Beneficiary become an owner of a foreign trust? Does the beneficiary have the power to vest trust capital in themselves by virtue of their roles in the corporate trustee? U.S. Grantor Trust income tax and reporting obligations can follow. |
|
| Appointors / Trustee succession | N/a unless U.S. Person 🡪 | 🚩 Residency of Trustee?
(See above for control of corporate trustee) |
N/a unless U.S. Person 🡪 | 🚩 Is the U.S. Person a grantor of the Trust?
Have they made loans or gratuitous transfers to the Trust? Does the trust have Unpaid Present Entitlements owing to them? U.S. Grantor Trust income tax and reporting obligations follow. 🚩Is the U.S. Person a Trustee or Appointor of the Trust? Do they have the power to vest trust capital in themselves by virtue of their roles in the corporate trustee? U.S. Grantor Trust income tax and reporting obligations follow. 🚩Is the trustee a corporate trustee? CFC Reporting may apply. See above. 🚩What assets are held by the trust? Does the Trust hold interests in PFICs? The PFIC rules can apply. See above. 🚩Is the Trust a foreign trust with a U.S. Beneficiary? Trust anti-deferral rules can apply. |
|
