CGT on dead wife’s wedding ring. Faults in Will drafting.
Capital Gains Tax on dead people's jewellery - CGT death duty on a wedding ring
Sometimes people make a mistake and name a Specific Gift in their Will. For example, ‘my wedding ring to my daughter’. The result may be CGT death duty on a wedding ring.
When your Will goes in for Probate it becomes a public document. Both the newspapers and the ATO can get a copy of your Will.
Because the wedding ring was mentioned in the Will, the ATO watches what the daughter does with your ring. Does she give it back to her dad? Does she give it to her own daughter who is getting married? Either way, the ATO demands Capital Gains Tax on the daughter’s ‘disposal’ of the ring: even though the ‘disposal’ was a gift. She suffers CGT death duty on a wedding ring.
CGT death duty on a wedding ring - why?
I got married a long time ago, but I think it is safe to say that your future wife will not put up with a ring under $500 in value. (My clients tell me $10k upwards is more the norm.) Capital Gain Tax is payable if the ring costs more than $500: section 118-10(1) Income Tax Assessment Act 1997.
Section 118-10(1) states:
'A capital gain or capital loss you make from a collectable is disregarded if the first element of its cost base, or the first element of its cost if it is a depreciating asset, is $500 or less.'
Is a wedding ring a 'collectable'?
Section 108-10(2) states that 'a collectable is ... artwork, jewellery, an antique, or a coin or medallion ... that is used or kept mainly for your personal use or enjoyment.'
If you are divorcing then you could argue there was not much 'enjoyment'. Otherwise, you suffer CGT death duty on a wedding ring.
How much CGT death duty on a wedding ring is payable?
You only pay CGT on the 'gain'. For example, you buy a capital item for $1. You then sell it for $3. Your capital gain or profit is $2. You put the $2 on your tax return as a capital gain. You pay CGT on the $2.
My clients tell me that a piece of jewellery generally devalues 90% at the moment of purchase. Therefore, a $20,000 engagement ring is worth about $2,000 when you slip it on your wife's finger. In that case, your wife is deemed to have acquired the ring for $2,000. Your wife's cost base is $2,000.
When your wife dies the person that gets her ring inherits her cost base of $2,000. Say your daughter gets the ring through the Will. Your daughter is deemed to have acquired the ring for $2,000. Your daughter inherits her mother's cost base.
Now let's say your daughter gives the ring away, for free. Sadly, she must calculate CGT on the ring's 'market value'. The 'market value' is not the cost base amount of $2,000. Rather the 'market value' is the value of the ring the day that your daughter gave it away. Let's say that the ring is now worth $10,000. Your daughter got the ring for $2,000. When she gave it away it was worth $10,000. The daughter is deemed to have made an $8,000 capital gain from 'disposing' of the ring. That needs to go on her tax return.
1. Mum 'acquires' the ring for $2,000 - from her husband at their wedding ceremony.
2. Mum dies leaving the ring to her daughter in her Will. The daughter is deemed to have 'acquired' the ring for $2,000.
3. The daughter then gives the ring to another family member. At that time the ring is worth $10,000. $10k - $2k = $8k. The daughter has made a 'profit' of $8,000. She pays CGT on the $8,000 profit ('gain').
Reduce the profit from the holding costs?
What if the dead wife and her husband had borrowed money to pay for the ring? Is the interest deducted from the 'profit'? Usually, but not in this instance. Government officials care little for the nonsense of marriage. There is a special little rule in the Tax Act. You are not allowed to take the cost of the interest repayments off the profit you made. See section 108-17.
Not to worry, at least the cost of insuring the ring all these years by both the dead mum and then her daughter is taken off the profit? Again sadly, no.
But it was a gift - how do I work out the 'market value'?
Dead mum is deemed to have got the ring for $2,000. When she died her daughter inherited the ring's $2,000 cost base. But by the time that the daughter handed the ring to her own daughter the 'market value' of the wedding ring had shot up to $10,000. But does 'market value' apply? Section 112-5(2) provides:
'The first element of your cost base and reduced cost base of a CGT asset you acquire from another entity is its market value (at the time of acquisition) if:
(a) you did not incur expenditure to acquire it, except where your acquisition of the asset resulted from:
(i) CGT event D1 happening; or
(ii) another entity doing something that did not constitute a CGT event happening; or
(b) some or all of the expenditure you incurred to acquire it cannot be valued; or
(c) you did not deal at arm's length with the other entity in connection with the acquisition.'
The gift was on a non- arm's length' basis. ('Love' is not commercial.) The deemed 'disposal' value is the market value of $10,000. The daughter's profit (gain) was $8,000. For more information see my doctoral thesis on the 'market value' rule.
Specific Gifts in Wills are bad
Specific Gifts, like jewellery, cars and cash, in Wills are generally a bad idea because:
1. you have no idea of what assets you own at the date of death. Therefore, a Specific Gift often delivers cruel results. Instead, it is better to leave everything as a percentage to Residuary Beneficiaries. For example:
(a) everything to my spouse;
(b) but if my spouse dies before me then everything to my children equally
Therefore, you leave it up to your spouse and children to work out what to do with your jewellery, Lladro statues, favourite car and tools in the garage. Stop ruling from the grave. Specific Gifts - bad. Residuary Beneficiaries - good. To see more on this start building your Wills here and read the hints on this subject.
2. By documenting assets in your Will, you alert the government and the public as to what you own. While you still have to pay tax on the capital gain of your wedding ring, what you own is best kept private.
Start building your Will here to see why.
For more information please contact us.
Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Taxation Partner, Legal Consolidated Barristers and Solicitors
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