It’s always wise to take legal advice when preparing a will to avoid the risk of your family losing much of the gift.
Take, for example, the case of a wife, Kate. She wants to leave everything to her husband Scott, except her share portfolio, which she wants to go to their daughter Sophie.
The complication is that the family company that owns the business assets, which are to be left to Scott, also owns some of the listed company shares Kate has funded and wishes to leave to her daughter. Husband and wife each own 50 per cent of the family company shares.
Under tax law, a private company is taken to pay a dividend to an associate of the shareholder if the company transfers property to that associate for less than full market value. The definition of associate is very wide and certainly includes father and daughter.
So if Kate leaves her shares in the family company to her husband, subject to the condition that he make the company transfer the listed shares to Sophie, and assuming income tax law stays the way it is till Kate’s death – and Kate dies before her husband – Sophie’s gift will come with a hefty tax bill. The amount of the dividend is the value of the shares at the time they are transferred, assuming the net assets of the company exceed its paid-up capital by at least the amount of that value.
The dividend cannot be franked. If Sophie is on the top rate of tax when her mother dies, tax of 46.5 per cent (including Medicare Levy of $4,650 for every $10,000 value) will potentially have to be paid by her.