Will a share transfer after death trigger a tax trap?

My wife has terminal cancer and is in the latter period of her life. We own about $300,000 worth of shares, mostly in banks. When my wife passes, the shares we hold jointly will transfer to me. How are those shares treated? Will I have to pay income tax on them?

We are both pensioners in our 80s and were hoping to leave as much as we could to our two boys so that they can live a bit easier than we did. We own our home.

There will always be a capital gains tax assessment whenever you sell shares.Credit: Kerrie Leishman

Thanks for your question and sorry to hear about your wife’s condition. Generally, when an asset changes ownership, a capital gains tax assessment is triggered.

However, there is an exception where that change of ownership is caused by the death of the owner of the asset. In this instance, the capital gains position may continue unimpacted. In the circumstance you describe, there is no tax payable at the point the ownership changes from joint to individual. However, there will remain capital gains tax assessable whenever the shares are eventually sold.

You mentioned that most of these shareholdings are in the banks. Potentially, you could be holding CBA shares bought in the float at $5.40, in which case you may be sitting on a large gain. If that is the case, you should sit down with a tax accountant and consider whether these shares should be sold now, when the capital gain can be spread across two individuals, rather than wait until the entire gain would be attributable to you solely, or more likely, your sons if they were to inherit the shares.

Individually, we can earn up to $18,200 before paying any tax. (Even more in your case as a pensioner). As a couple, this tax-free amount is effectively doubled to $36,400, meaning you have a lot more room to absorb a capital gain.

Note, however, that if you sell the shares and trigger a capital gain, this will impact the income test for your age pension, potentially resulting in you losing your age pension for a period of time. It would therefore be important to evaluate the tax saved by liquidating the investment now, versus the age pension lost.

Finally, ensure your superannuation nominations are up to date, and that your estate planning documents are in order, particularly concerning a power of attorney for you, likely one or both of your sons.

I read somewhere a reference to income stream accounts being taxed at 15 per cent from age 60 to 65. If this is true, then there would appear to be no benefit to opening an income stream account before 65, and indeed a disadvantage because there is a minimum withdrawal requirement of 4 per cent.

This would have been in reference to a “transition to retirement” income stream. These are pensions established from superannuation while you are still in the workforce. Their intended purpose is to facilitate people making a staged transition into retirement by reducing their working hours, and therefore income, and then topping that now-reduced income up via superannuation.

In this arrangement, tax on super earnings remains the same as in the accumulation phase, and so you are quite right, there is no particular tax benefit here. That said, in some cases, a benefit can be engineered where the income drawn from the “transition to retirement pension” enables the individual to make extra salary sacrifice super contributions.

Paul Benson is a Certified Financial Planner at Guidance Financial Services. He hosts the What’s Possible? and Financial Autonomy podcasts. Questions to: [e-mail]

• Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

Expert tips on how to save, invest and make the most of your money delivered to your inbox every Sunday. Sign up for our Real Money newsletter.