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The Family Farm - Life estates can be dealt with tax effectively |
If you have a life estate, there are ways to remove it without suffering adverse taxation consequences. |
Consider this hypothetical situation. Bob leaves the family farm, which he owned prior to the introduction of capital gains tax in 1985, in trust to his wife Betty for life, and, after her death, equally to his children, Bill and Sue. Under his will, Betty is entitled to all the income from the trust and Bill and Sue to the capital after her death. Bob leaves his interest in the business on the farm to Betty and Bill equally. Bill wants to embark on a major development on the farm but ensure before doing so that he will one day receive the entire farm. Betty and Sue are happy to sell. |
A Tax Office interpretative decision of a similar situation stated that the surrender of the life interest would be a capital gains tax event. Betty would have to include the value of her life interest, less any incidental costs associated with its acquisition, as a capital gain in her assessable income. However, the general capital gains tax discount means she will only pay tax on half the value of her life estate. |
In addition, based on a Tax Office private binding ruling, the small-business 50 per cent capital gains tax reduction will be available to Betty if the terms of the will are suitable and the transfer of the farm to Bill is structured correctly.In addition, based on a Tax Office private binding ruling, the small-business 50 per cent capital gains tax reduction will be available to Betty if the terms of the will are suitable and the transfer of the farm to Bill is structured correctly. |
If her net assets are worth less than $5 million, Betty can take advantage of the small-business CGT concessions to reduce the taxable capital gain to zero. |
Interpretative decisions are not legally binding on the Tax Commissioner and rulings are only binding on the person or entity on whose behalf they were sought. In situations like this one, a private ruling is desirable. Contact Peter McNamara peter.mcnamara@cml.com.au if you would like advice on trusts, wills or capital gains tax. |
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