How Inheritance Is Taxed in Australia: A Simple Guide for Families and Executors
Key takeaways
- No Direct Inheritance Tax: Inheritance tax was taken away in Australia in 1979. So, you won’t have to pay a government levy on the inheritance value itself.
- Tax Liabilities on Assets: There’s no inheritance tax in Australia, but you may face other taxes like income tax, capital gains tax (CGT), and superannuation death benefit taxes when handling inherited assets.
- Capital Gains Tax (CGT): You’re liable for CGT when you sell, gift, or transfer inherited assets. CGT tax is based on the asset’s value at the time of the deceased’s death or original purchase price.
- Exemptions from CGT: Full or partial tax exemptions may apply to inherited properties, especially if you sell within two years of the deceased’s death and if it was their primary residence.
- Income Tax on Inherited Assets: Income coming from your inherited assets, like rent or dividends, is taxable, even though you won’t pay income tax on the inheritance itself.
- Superannuation Taxation: Superannuation death benefits are typically tax-free for certain beneficiaries, such as children under 18, while non-dependent adults may face tax on a portion of these benefits.
- Foreign Inheritance Considerations: Inheriting foreign assets may trigger tax obligations in that country and have other potential implications under Australian tax law.
- Importance of Planning: Proper estate planning knowledge is crucial for effectively dealing with tax obligations and reducing liabilities.
Whether you’re thinking about estate planning or anticipating receiving an inheritance, the concept of inheritance tax in Australia can be confusing. Although Australia abolished inheritance tax in 1979, receiving an inheritance is not necessarily tax-free. You might encounter tax obligations connected to capital gains, income from inherited assets, and superannuation death benefits. So, what can you expect when inheriting or planning your estate in Australia? How can you minimise financial liabilities? Let’s take a detailed look.
(Note: this is general guidance and we recommend you seek professional advice for your case and circumstances)
What is inheritance tax in Australia?
Do you pay tax on inheritance? Technically, the inheritance tax Australia-wide no longer exists, at least not in the same form as in the United States, the United Kingdom, and other countries. What we mean is, there is no direct tax or government levy on the value of an inheritance when it is transferred to beneficiaries.
That said, there are still other tax liabilities that can be triggered based on what you do with the assets when they’re in your possession. The main taxes you should think about include:
- Income tax
- Capital gains tax (CGT)
- Superannuation death benefit taxes
Though you won’t pay a dedicated inheritance tax upfront, understanding the associated taxes is still critical to responsible financial and estate planning.
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Capital gains tax and inherited property
The capital gains tax is one of the main ways you can incur tax liabilities from your inherited assets, like real estate or shares, as an Australian.
When does CGT apply?
You don’t pay CGT at the point of inheritance. CGT is assessed when you dispose of the asset, however. This is when you gift, sell, or transfer an inheritance. The asset’s gain is calculated based on its market value at the time of the deceased’s death if the asset was acquired before 20 September 1985, or the original purchase price if it was acquired after that date.
What does this mean? Well, if, for example, you inherit a home but sell it at a higher market price five years later, you could be liable for capital gains tax on any increase in value. Yet, if the inherited property was the deceased person’s primary residence and wasn’t used to produce income, a full or partial exemption could apply.
Exemptions and reductions to CGT
There are several exemptions to the inheritance tax Australia-wide.
- Main residence exemption: If the inherited property had been the deceased person’s principal place of residence and you sell it within two years, you may not need to pay CGT.
- Two-year rule: You can get a full CGT exemption if the property is sold within two years of the deceased person’s death, regardless of whether the property is rented out during that time.
- 50% CGT discount: If you held the asset for more than 12 months before selling it, you might qualify for 50% CGT discount.
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Income tax on inherited assets
You don’t pay income tax just for receiving an inheritance. That said, any income generated from inherited assets is still taxable.
Rental income
If you inherit an investment property or you rent out a former family home, the rental income must be reported in your annual tax return. You can claim typical property expenses, such as depreciation and maintenance, as tax deductions. You must pay tax on the net income, however.
Dividends and interest
If you inherit bank accounts or shares, on the other hand, dividends earned from inherited shares are subject to income tax, with interest from savings or term deposits also considered taxable.
This ongoing income is not considered part of the Australian inheritance tax framework. That said, it’s still important to account for it in your annual tax planning.
Tax-free situations
Superannuation may be paid to a child under 18, a spouse or de facto partner, a person who is financially dependent on the deceased, or another type of tax-dependent beneficiary. In this case, the superannuation death benefit is then generally tax-free.
Taxable situations
If the benefit is paid instead to a non-dependent adult child, part of it may be subject to tax. One example of this is the taxable component of superannuation, which is taxed at 15%, plus the Medicare levy of up to 17%. If the benefit instead comes from an untaxed source, the rate could be as high as 30%.
Superannuation isn’t automatically part of an estate unless a binding death benefit nomination directs this. This is why proper planning is so essential.
Overseas assets and inheritance tax
What happens if you inherit assets located overseas? In this situation, you can still face foreign inheritance tax or estate duties, depending on the laws of the country
If you inherit property in the UK, for example, you could be liable for UK inheritance tax. Receiving overseas income or selling a foreign asset could also have Australian tax implications under global income reporting rules.
How can you minimise tax liabilities with strategic planning?
Though Australia doesn’t have an inheritance tax, good planning can still eliminate or reduce the tax obligations associated with managing inherited assets.
Strategic asset disposal
We mentioned earlier how selling within the two-year exemption window means complete exemption from CGT. So, be sure not to delay selling an inherited property.
Testamentary trusts
A testamentary trust can be established through a will. It comes into effect upon the death of the testator (the person who created the will) . A testator gains flexibility in distributing the income among beneficiaries, as well as tax benefits, especially for minor children. A testamentary trust also protects the inherited assets from creditors, bankruptcy, and divorce.
For more information about applying for funding to assist with the costs of estate administration or early access to your estate assets, fill out our form or contact us directly at enquiries@justfund.com.au or 1300 644 980 to see if you qualify.
