Nick Bruining Q+A: How capital gains tax works and how it will impact the sale of a share portfolio

Question

I am 76 years old, and over the years have acquired a share portfolio that has just hit $1,161,446 in value.

I have not traded in these shares for years.

Because no shares were purchased before 1985, I am up for an estimated $879,387 capital gains tax bill.

I would like to leave the shares to my four adult grandchildren in equal portions.

What is the best way to do this?

Answer

We first need to clear up some possible confusion over how capital gains tax is calculated, because the figure you have stated is almost certainly incorrect.

When the shares are disposed of, typically when sold, each individual share will have its own cost-base — essentially the net purchase price of the share. This is significant because a portion of your share portfolio may have been acquired at different times and at different prices.

This often happens when dividend reinvestment programs are in place, so it is likely that many “small” calculations will need to be done.

As the shares have been held for 12 months, the gross profit is then halved. That means that even if you had been given the shares at no cost, the maximum probable assessable capital gain would be half of $1,161,446 — or $580,723. In your case, and as the shares have been held for a while, the assessable amount for tax purposes may well be many thousands of dollars.

This 50 per cent net assessable amount is then added to any other income you earned during the year and you pay tax at your normal marginal rate of tax. There is no “special” CGT rate.

Nonetheless, the most effective strategy may be to hold on to the shares and to leave them to your grandchildren in equal proportions.

Depending on their own circumstances, they may prefer to take the cash in lieu of the shares. In this case, the executor of the estate could sell their portion of the portfolio and the estate would pay the tax.

For equity purposes, as far as the other grandchildren are concerned, it would be fair for the tax liability to be paid from the sale proceeds. If, however, the grandchildren decide to take the shares without selling them, they effectively inherit your cost base on those shares.

If and when they decide to sell, the tax would be calculated in the same manner and they would pay the tax based on the sale price then.

Given the value of the estate, you would be wise to seek advice from a specialist estate planning financial planner and solicitor. There are special vehicles such as testamentary trusts which may prove beneficial.

We will explain their operation in a future article in Your Money.

Question

My wife and I are in our 80s and we both have funeral bonds which we purchased a while ago. They are now worth about $16,200 each.

Following a recent article in Your Money, I now realise that the maximum amount that can be invested in these schemes for this year is $15,750. We both receive a part-aged pension.

We have also pre-purchased a niche in the garden of a cemetery for our ashes and we were told that this is also exempt.

Does that mean we are double-dipping and will Centrelink assess any amount over $15,750?

Answer

The $15,750 figure is the amount that can currently be invested in a recognised funeral bond fund.

From the time of investment, it is disregarded under both Centrelink means tests. That also extends to any growth that occurs within the fund, so it will not affect your pensions.

The rules surrounding pre-payment of funerals are complex, but specifically set a limit for the amount invested in a recognised funeral bond fund.

Pre-payment of other funeral expenses do not form part of that limit. Under these conditions you could negotiate the cost of a funeral with a funeral director and pre-pay that agreed amount, even if it exceeds the $15,750 limit.

In some cases, funerals can cost tens of thousands of dollars.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association