Sometimes the costliest mistakes begin with the best of intentions. One Australian family thought they had found a practical solution to help ageing parents secure a home in later life. Instead, the oversight left their daughter with a crushing $200,000 tax bill that stripped away most of her inheritance.
What unfolded was not just a financial misstep but a cautionary tale about the hidden dangers of informal family arrangements.
In this article
How it all began
The situation began when an elderly couple in New South Wales wanted to relocate but keep their long-time family home for relatives still living there. Because of their age, banks refused to lend them money for a new property. The solution seemed simple enough—place the new house in their daughter’s name so she could secure the mortgage.
For more than 30 years, the arrangement appeared to work perfectly. The parents lived in the property, paid all loan repayments, rates, and maintenance, and even invested heavily in improvements. When they sold their old family home, they used the proceeds to clear the mortgage on the new one.
In their wills, both parents divided the estate equally among their four children. Each expected to receive around $250,000 when the property was sold.
The devastating tax shock
But when both parents passed away, the Australian Taxation Office (ATO) dealt the family a devastating blow.
The ATO ruled that the daughter was the legal owner of the property because no trust documentation existed. Despite the family’s clear understanding of the arrangement, the tax office refused to accept she had held it on trust for her parents.
The consequences were severe. The property had been purchased before 20 August 1991, which meant harsher capital gains tax rules applied. Those rules prevented holding costs—such as interest, rates, and insurance—from being added to the property’s cost base. The improvements funded by the parents also could not be included.
The result was a taxable capital gain of $425,000 on the $1 million sale. The daughter was left with a tax bill of nearly $200,000. From what should have been a $250,000 inheritance share, she received just $50,250.
'The ATO can simply put its hands over its collective ears and say 'we just don’t believe you.' And who can afford to fight the ATO all the way through the court system? You are guilty until you can prove yourself innocent.'
The risks of verbal agreements
This case revealed how vulnerable families can be when relying on verbal agreements. It also exposed the cruel effect of pre-1991 capital gains tax rules, which still ensnare many Australians today.
Pre-1991 CGT Rules Still Bite
Properties purchased before 20 August 1991 cannot include holding costs like interest payments, rates, and insurance in their cost base for capital gains tax calculations.
This can result in substantial tax bills even when the total cost of owning the property exceeds the sale proceeds.
If the property had been held under a formal trust, the parents could have claimed the main residence exemption, potentially eliminating the tax bill. A trust would also have allowed capital gains to be shared across beneficiaries, reducing liability further.
Warning signs are easy to miss but often present. Risk factors include having property in one name while others cover the costs, relying on verbal agreements about inheritance, or involving pre-1991 properties in family plans.
The lesson is clear—document everything. Families should seek professional legal and tax advice, review existing arrangements, and consider formal trust structures where significant assets are involved.
Did you know?
Did you know? The ATO received more money from this family’s estate than the daughter inherited. After paying nearly $200,000 in capital gains tax, she was left with just $50,250 from what should have been a $250,000 inheritance share.
How the loss could have been prevented
The tragedy is that the daughter’s loss could have been prevented with straightforward legal planning. What seemed like an act of support and common sense turned into a devastating financial penalty.
Example Scenario
- The Johnsons’ story Parents aged 75 want to move to a retirement village but keep their Sydney home for their son who’s going through a divorce.
- The risk They put a Gold Coast unit in their daughter’s name for the mortgage. Without proper trust documentation, both properties could face devastating CGT liabilities when the parents eventually pass away, potentially costing the family hundreds of thousands in unnecessary taxes.
The family’s experience proved one of the hardest truths about estate planning—good intentions mean nothing without documentation.
Protect Your Family’s Inheritance
- Never rely on informal family arrangements for significant assets
- Get professional legal and tax advice before making property arrangements
- Document all family financial arrangements with formal agreements
- Review and update estate planning regularly
- Consider family trust structures for significant wealth
- Act now—waiting until after someone passes away is often too late
What This Means For You
An informal property arrangement ended up leaving a daughter with a $200,000 tax bill—money that should have remained in her inheritance. Properties bought before 20 August 1991 remain particularly risky under outdated capital gains tax rules that can still trap unsuspecting families.
With proper trust documentation, much of this liability could have been reduced or avoided altogether. For seniors and their families, the lesson is clear: professional legal and tax advice is not optional when it comes to safeguarding inheritances—it is the only way to protect the wealth you worked so hard to build for the next generation.
This family’s experience showed just how devastating the consequences of an informal arrangement can be when critical documents are missing.
But inheritance mistakes don’t only come from tax traps—sometimes, they happen because a will isn’t updated when life circumstances change.
To see how small oversights in estate planning can create big problems, here’s another story worth reading.
How a simple mistake cost this taxpayer $200,000 in inheritance — A Sydney Morning Herald report on how an informal family property arrangement triggered a devastating CGT bill after the ATO refused to recognise the daughter as holding the home on trust for her parents.
https://www.smh.com.au/money/super-...r-200-000-in-inheritance-20250909-p5mtkc.html
Trust capital gains and losses | Australian Taxation Office — Explains how CGT applies when beneficiaries are absolutely entitled to trust assets, treating ownership as if it were held directly.
https://www.ato.gov.au/businesses-a...-capital-gains/trust-capital-gains-and-losses
Family Trusts In Australia: Setup, Benefits & Tax Advantages | 2025 — Outlines how family trusts operate, their tax implications, and the need to comply with ATO rules on income distribution to avoid penalties.
https://accountantsdirect.com.au/family-trust-australia-setup-benefits-tax/
Trust distributions | Australian Taxation Office — Details how trust deeds can allow capital gains to be streamed to specific beneficiaries for tax purposes, provided compliance conditions are met.
https://www.ato.gov.au/forms-and-in...a-about-capital-gains-tax/trust-distributions
Family trusts: legal and tax considerations—HLB Mann Judd — Explains the complexity of trust structures, highlighting the importance of consulting the trust deed and seeking professional advice.
https://hlb.com.au/family-trusts-legal-and-tax-considerations/
Could your family arrangements withstand the ATO’s scrutiny, or would they collapse under the same costly mistake?
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