Who pays capital gains tax on a deceased estate?

When someone dies, capital gains tax (CGT) does not disappear with them. It usually falls to whoever eventually sells the asset, whether that is the estate itself or the person who inherits it. As Executor, understanding who is liable, and when, helps you avoid a costly surprise for the estate or its beneficiaries.

Death itself is not a capital gains tax event. Under the tax rules, any gain or loss on an asset the deceased owned is disregarded when it passes to their Executor or a beneficiary. Capital gains tax only becomes relevant later, when that asset is eventually sold or otherwise disposed of. Until then, no CGT is payable simply because ownership has changed hands due to death.

This depends on when the asset is sold.

If the estate sells the asset before it is distributed, the estate, through the Executor acting as trustee, is responsible for reporting and paying any CGT in the estate’s tax return.

If a beneficiary inherits the asset and sells it later, the CGT liability sits with the beneficiary, reported in their own personal tax return for the year they sell.

Either way, the sale is what triggers CGT, not the inheritance itself.

The cost base is what determines the size of any capital gain, and which one applies depends on when the deceased originally acquired the asset.

Acquired before 20 September 1985 (pre-CGT): the cost base resets to the asset’s market value on the date of death.

Acquired on or after 20 September 1985 (post-CGT): the deceased’s original cost base carries over to whoever inherits it.

For pre-CGT assets, a beneficiary can generally treat their ownership as starting from the date the person died, which usually means the 12-month holding period needed for the 50% CGT discount is already met.

Often not, if it is sold within the right timeframe. If the property was the deceased’s main residence and was not being used to produce income immediately before their death, a sale that settles within two years of the date of death is generally fully exempt from CGT.

If the home was rented out before death, or the two-year settlement deadline is missed, the exemption may only be partial or may not apply at all.

The ATO can automatically extend the two-year period, by up to 18 months, where the delay was genuinely outside the Executor’s control, for example a contested Will, a complex estate, or a sale that fell through for reasons unrelated to the estate’s own inaction.

It can, but it comes down to tax residency, not citizenship or a passport.

Case study: Elderly Victorian dies and leaves estate to his daughter, who now lives in the UK

Take a common scenario: a Victorian father dies, and his daughter, a dual Australian and UK citizen who has lived and worked in the UK for years, is classified a UK tax resident rather than an Australian one. If she inherits an asset he bought after 20 September 1985, such as shares or a managed fund, the usual rule that disregards CGT on death doesn’t apply. Instead, a capital gain or loss is calculated using the asset’s market value at the date of death, and it’s included in her father’s own date-of-death tax return, not hers.

This rule doesn’t apply to the family home or other Australian real estate, which stays taxable Australian property no matter who inherits it. So, if the estate’s main asset is the house, the main residence exemption above still applies in the usual way.

Because the outcome depends on exactly what’s in the estate and the beneficiary’s residency status at the date of death, and can trigger tax obligations overseas too, this is one worth getting right. State Trustees can help confirm how it applies to your estate.

Below are some of the areas Executors can get wrong. Speak to State Trustees to ensure you make well-informed decisions and avoid these pitfalls:

• Assuming inheriting an asset itself triggers a tax bill. It does not.
• Missing the main residence two-year deadline without applying for an extension in time.
• Using the wrong cost base, particularly for assets bought before 1985.
• Not keeping records of the deceased’s original purchase price and any improvements.
• Distributing estate assets before confirming the estate’s full tax position, which can create personal risk for the Executor.

Capital gains tax is only one part of an Executor’s tax obligations, and getting it wrong can delay the estate or create risk for you personally. Our deceased estate tax return service reviews the tax affairs of the deceased and their estate and takes care of it correctly and on time, so you are not left guessing.

If you have been appointed as an Executor in Victoria and are not sure where to start, read our guide on what an Executor is responsible for, or find out how probate works as the first step in administering the estate.