Capital Gains Tax on Collectables: 8 Tips for Executors
Mum’s jewellery. Dad’s coin collection. The dusty painting that has hung in the hallway for decades. Do you have to pay capital gains tax (CGT) on these items?
These eight tips will explain what to look out for when there are collectables in an estate. Always check with a tax adviser before selling or distributing an item.
Tip 1: Know which items count
Not every valuable possession is a collectable for tax purposes. Examples include artwork, jewellery, antiques, coins, medallions, rare books or manuscripts, and stamps kept mainly for personal use or enjoyment.
Tip 2: Understand the $500 exemption
Some low-cost collectables are exempt from CGT – there is a $500 threshold test. For an inherited item, the amount you compare with the $500 threshold generally depends on when the deceased acquired the item:
· Before 20 September 1985: use its market value at the date of death.
· On or after 20 September 1985: use the deceased’s cost base at death, which generally includes the purchase price and certain other recognised costs. The cost base is the starting amount used to work out a capital gain.
If that amount is $500 or less, any capital gain or loss is generally ignored.
Special rules apply to part ownership and sets, so check before relying on the exemption.
Tip 3: Remember that death usually doesn’t trigger CGT
Death generally doesn’t create an immediate CGT bill. The same usually applies when an item passes to a beneficiary as part of their inheritance. However, a later sale may trigger CGT. Transfers involving overseas beneficiaries, charities or agreements to change the estate’s distribution need particular care and advice.
Tip 4: Check who should sell
If the estate sells an item, the estate makes the capital gain. If a beneficiary inherits the item and later sells it, the beneficiary makes the gain.
Before deciding who should sell the item, consider the Will, the estate’s need for cash and the beneficiaries’ circumstances. Your lawyer and the estate’s tax adviser can help assess the options.
Tip 5: Gather purchase and cost records
Establish the cost base before selling, rather than trying to reconstruct everything at tax time.
Look for purchase receipts, auction records and invoices for relevant expenses. Not every expense can be counted: for example, insurance and storage costs generally cannot be added to a collectable’s cost base. Ask the tax adviser to confirm the calculation.
Tip 6: Arrange the right valuation
A valuation can help with both tax and distribution decisions, particularly where items are valuable, records are missing or beneficiaries disagree about value.
Use someone experienced in valuing that type of item. Explain whether you need its value at the date of death, its current value, or both. These figures may differ, and an old insurance valuation may not provide the answer you need.
Tip 7: Pass the records on
Keep photographs, valuations, purchase records, authenticity certificates and documents showing the item’s ownership history. Also retain sale records, expense invoices and details of transfers to beneficiaries.
If a beneficiary receives the item, give them the relevant records. They may need them to work out the tax position when they sell, even decades later.
Tip 8: Keep collectable losses separate
A capital loss on a collectable can only offset capital gains on other collectables. It can’t reduce a gain on property or shares. Unused collectable losses can generally be carried forward.
Capital losses from other assets may, however, reduce a collectable gain, subject to the usual tax rules.
Get advice before selling or distributing
Before the jewellery goes to auction or the painting goes home with a beneficiary, check the tax position. At Varga Lawyers, we can help you administer the estate and work with your tax adviser to address these issues early. Contact us for help with administering an estate.
This article provides general information only and is not legal, taxation or financial advice. Obtain advice tailored to the particular estate.