Australian investors are always seeking ways to optimise their returns and minimise their tax obligations. One concept that’s often discussed in estate planning and investment circles is the “step-up in basis.” While it’s a term more commonly heard in the United States, its principles are relevant for Australians, especially with ongoing discussions around capital gains tax (CGT) and inheritance rules in 2025. Let’s unpack what step-up in basis means, why it matters, and what’s changing this year.
Understanding Step-Up in Basis: The Basics
In simple terms, a ‘step-up in basis’ refers to the adjustment of the value of an inherited asset for tax purposes. When an asset (such as shares, property, or a business) is passed on after someone dies, the cost base—the value used to calculate capital gains tax—is reset to the asset’s market value at the date of death. This means that any capital gains accrued during the original owner’s lifetime are effectively wiped out, and the beneficiary only pays CGT on any gains made after inheriting the asset.
- Example: If you inherit a property bought for $200,000 in 1995, now worth $1 million in 2025, your new cost base for CGT purposes is $1 million, not $200,000.
- This reduces your potential tax bill if you later sell the asset, as you’re only taxed on gains made after you inherited it.
Australia’s CGT system does incorporate a step-up in basis for most inherited assets, but with some important exceptions and nuances, especially as tax policy evolves.
Recent Policy Changes and Political Debates in 2025
2025 has brought renewed attention to the step-up in basis due to the government’s ongoing reviews of tax concessions and potential CGT reforms. While no sweeping changes have been enacted yet, the following updates are shaping the conversation:
- ATO Guidance Updates: The ATO has clarified that beneficiaries continue to receive a step-up in basis for inherited assets, but stricter record-keeping is now required to substantiate market value at date of death.
- Superannuation and Step-Up: Inherited superannuation assets are treated differently, with special rules applying to death benefits and potential tax liabilities depending on the relationship to the deceased and the type of fund.
- Policy Watch: Some policymakers and think tanks have floated the idea of phasing out step-up in basis for high-value estates to address housing affordability and intergenerational wealth transfer. As of mid-2025, these remain proposals, but investors are advised to monitor the debate.
It’s worth noting that, unlike the US, Australia does not have a federal inheritance tax, but CGT on inherited assets acts as a de facto estate tax in many cases.
Practical Implications for Australian Investors
So, how does step-up in basis affect your financial planning in 2025? Here are some key considerations:
- Estate Planning: The step-up in basis makes it more tax-efficient to hold appreciating assets until death, as unrealised gains are effectively eliminated for heirs. This is especially relevant for property owners and share investors.
- Gifting vs. Bequeathing: Transferring assets via inheritance can be more tax-effective than gifting during your lifetime, since gifts do not receive a step-up in basis and may trigger immediate CGT events.
- Record-Keeping: With increased ATO scrutiny, maintaining up-to-date records and obtaining professional valuations at the date of death is essential to ensure beneficiaries can claim the correct cost base.
- Family Trusts and Companies: Assets held in trusts or companies may not qualify for the same step-up rules, so structuring your investments appropriately is vital.
Let’s consider a real-world scenario: Jane inherits her father’s Sydney investment property in 2025, valued at $2 million. Her father purchased it for $600,000 in 2000. If Jane sells the property in 2027 for $2.2 million, she will only be taxed on the $200,000 gain since 2025—not the $1.6 million gain accrued during her father’s lifetime.
What Should Investors Do Now?
With the step-up in basis remaining a critical feature of Australia’s CGT regime, investors and families should:
- Review estate plans and asset structures in light of current and potential future rules.
- Keep thorough records and seek professional valuations when inheriting assets.
- Monitor policy developments, as any change to step-up rules could have major financial implications.
