Estate Planning: CGT K3 Event and How To Avoid One

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Published by Preston Law on 25/10/2023

In recent years, easy and affordable travel and the advent of the internet and modern means of communication have resulted in a globally interconnected society. Because of this it is likely that many of you have friends and family dispersed all around the world.

While this phenomenon may come in handy next time you’re in Prague and need a place to stay, it can also present a problem when it comes to drafting your Will. As you may have guessed from the title of this article, that problem is a CGT event K3 (K3 Event).

What Is A K3 Event?

A K3 Event arises when a non-resident for tax purposes inherits a CGT asset under a Will that is not classed as “Taxable Australian Property” (non-TAP). Non-TAP assets are defined under the Income Tax Assessment Act 1997 (Cth) and, broadly speaking, fall into one of three categories:

  • Collectables (such as artwork, jewellery and antiques);
  • Personal use assets (such as boats, furniture and electrical goods); and
  • Other assets (including shares, units in a unit trusts, cryptocurrency and foreign currency).

Typically, when a beneficiary receives a CGT asset, capital gains tax only becomes payable after the asset has been disposed of (or income is earned on it) by the beneficiary. However, in cases where a non-resident beneficiary inherits a non-TAP asset, the tax liability will become immediately payable by that beneficiary.

How Do I Avoid a K3 Event?

If you’re preparing a new Will (or have an existing one) which includes a gift to a non-resident beneficiary, we recommend that you seek legal and financial advice as soon as possible as there are ways to avoid or defer triggering a K3 event:

  • Establishing a testamentary trust through your Will

This will mean that the assets will be owned by the trustee of the trust on behalf of the beneficiary, and the tax will be deferred until the non-TAP assets have been transferred to the beneficiary or sold to a third party.

Please note that establishing a testamentary trust with a non-resident beneficiary will result in it being deemed a foreign trust. This will result in a foreign surcharge of 2% on taxable land owned by the trust (valued at $350,000 or more) being applied in addition to standard land tax rates. Because of this, it is highly advised that you obtain legal and specialist tax advice before establishing a testamentary trust in your Will;

  • Draft smartly

More broadly, CGT (including tax triggered by a K3 event), can be reduced by selecting particular assets to go to particular beneficiaries.

For example, let’s say that you are giving the whole of your estate to one resident and one non-resident beneficiary. In your Will, you could leave a lesser proportion of non-TAP assets, but a greater proportion of other assets to your non-resident beneficiary. That way, the distribution is still equal in value, and the tax burden will be deferred.

Alternatively, we include a standard “appropriation’ clause in our Wills, which allows your executor/s and beneficiaries to make this decision themselves and restructure the distribution of your estate to mitigate or defer any immediate tax liability  (so long as the total value received by the beneficiaries is consistent with the Will).

  • Include a specific K3 Event Clause

You can include a direction in your Will which specifies that any tax payable arising as a result of a K3 event is to be borne entirely by your estate, or by the beneficiary who triggered it. It is important to note that if you nominate your estate to bear the tax burden, these costs will be paid from the residuary estate and reduce the share of the other beneficiaries.

It’s important that when you are creating your Will, you take into consideration any tax implications your beneficiaries may be liable for. For more information, speak to a lawyer in Cairns or Townsville today.

 

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