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Fall in Value of Assets after Death

24.52. Estate duty may give rise to hardship when an estate includes assets, which, though worth a great deal on the death of the owner, have fallen significantly in value. Under the present law, duty is assessed on the value of assets as at the date of death. The problem does not arise where property is valued for gift duty purposes, as the donor can select the time of the making of the gift and the assets are immediately available to the donee. To permit the sale price of an asset to be substituted for the value of the asset on death raises problems, as the personal representative may be expected to realise those assets that have fallen in value after death and to retain those assets that have risen in value. There is no easy solution to the problem. Nevertheless, it has to be recognised that the present law can produce inequitable results and ought to be modified so that the estate is protected from the impact of tax resulting from the inclusion of a particular asset in the estate the value of which diminishes significantly after death.

24.53. Where the personal representative decides to retain an asset of which he is free to dispose, the operation of the law is not unfair if the asset later falls in value. Likewise, if the personal representative decides to dispose of an asset and fails to avail himself of whatever means are open to him to prove his title to the asset and to free it for realisation, the beneficiary ought not to complain if the asset, when finally realised, produces an amount less than the value on death. But for one reason or another, it may be impossible for the personal representative to realise the asset at the time most advantageous to the estate.

24.54. An alternative valuation date provides one solution, though a solution which is not always satisfactory. If the market is volatile, the value of the relevant asset on the alternative valuation date may be as arbitrary as the value on death. If the alternative date is a considerable time after death, the personal representative is likely to defer the administration of the estate to see if the value of the estate falls. The calculation of capital gains tax payable on death will be complicated where an alternative valuation date is allowed. An alternative valuation date could not be available in relation to stock or to other assets of a business which change as the business is conducted. An option to elect for valuation on an alternative valuation date would have to be limited to assets that are not subject to frequent change: these would include real estate, shares listed on a recognised stock exchange and significant holdings in companies whose shares are not so listed and whose affairs are not conducted between the date of death and the alternative valuation date so as to produce a reduction in the worth of the holding.

24.55. Another proposal considered by the Committee is a rule that the tax payable in respect of any asset in an estate of a deceased person be limited to the net amount received on realisation of the asset within three years of death or within such longer period as the Commissioner may approve. To determine the tax payable in respect of any asset, the total tax payable on the whole estate would be apportioned between the assets in the estate on the basis of the values of the assets on death. The rule would be limited to the kinds of assets described in the previous paragraph, and the realisation principles outlined in paragraph 24.58 would apply. The rule avoids the problems of recalculating capital gains tax payable on death which an alternative valuation date involves.

24.56. Nevertheless, of the two proposals the Committee favours an alternative valuation date and recommends its adoption.

24.57. The alternative valuation date should be the first anniversary of the date of death. The onus of electing for valuation on the alternative valuation date should rest

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on the legal personal representative. Where the legal personal representative elects, all real estate, shares in listed companies and substantial holdings in unlisted companies of the estate should be revalued.

24.58. Where an asset is realised during the twelve months following death in an arm's length transaction, the net proceeds of the realisation should be deemed to be the value of the asset on the alternative valuation date. In determining the realised value of an asset, the cost of realisation should be deducted from the proceeds of realisation. If a realisation during the twelve months following death is not an arm's length transaction, the Commissioner should have power to substitute, for the actual proceeds, the proceeds that might have been expected on a sale conducted at arm's length. There will be problems where the asset has changed in some way between death and realisation, and account will need to be taken of improvements and changes made to property. But these problems should not be insurmountable.

24.59. The amount of a gift for purposes of duty should be determined by valuation at the date of the gift, irrespective of what happens subsequently.