Do I Need To Pay Tax On Inheritance In Australia?
Written by: Jamie Arrington l Accounting Team
Inheriting a substantial sum of money or asset can be a significant life event that can bring about a mix of emotions. When it comes to deceased estates, the process of managing and distributing those assets can often be accompanied by a multitude of challenges, making the process an incredibly difficult and stressful endeavour. One question that is often asked in our field is:
“Do I need to pay tax on my inheritance?”
And our answer is always the same:
“It depends!”
Taxation on Inheritances in Australia
In many countries, deceased estates incur a special kind of tax known as “inheritance tax” or “deceased estate tax”. However, in Australia, there is no specific tax levied against a deceased estate. Instead, we must consider the type of assets distributed and sold, as well as the monies distributed, and apply common taxation principles such as capital gains tax or income tax to those assets and monies. This can be applied at the deceased estate level or at the beneficiary level, with one or both parties lodging income tax returns on taxable amounts.
Capital Gains Tax (CGT) on Inherited Assets
The sale or disposal of assets may trigger the application of capital gains tax which then applies to any entity structure in Australia, including deceased estates. Capital Gains Tax may be applicable when assets of the deceased person are transferred or sold as part of the estate administration. Capital gains or losses may arise if the market value of the assets has increased or decreased since the deceased person acquired them. However, there are certain exemptions and concessions available, such as the CGT main residence exemption and the capital gains tax small business concession, which can reduce or eliminate the tax liability.
Not understanding the ins and outs of capital gains tax law surrounding deceased estates can lead to potentially painful and costly situations.
Beneficiaries may unintentionally overlook available exemptions and concessions and inadvertently incur higher tax liabilities. For instance, under the main residence exemption, if the deceased person’s property was their main residence at the time of their death, and it is sold within two years of their passing, the capital gain or loss is generally disregarded for the capital gains tax purposes. This means that any appreciation the property’s value since its acquisition by the deceased person is not subject to capital gains tax.
If the property is not sold within two years, the main residence exemption may still apply under certain circumstances. For example, if the property is sold after the two-year period but within four years, the exemption may be available if there are special circumstances, such as delays in selling due to factors beyond the control of the estate. It’s important to note that the main residence exemption may have limitations or variations depending on the specific circumstances, such as the usage of the property after the person’s death, whether it is rented out, or if the beneficiaries continue to reside in the property.
Want to know more on Capital Gains Tax? Check out this blog we previously put together: A Guide To Capital Gains Tax – FAQs
When it comes to capital gains tax and deceased estates, planning for the disposal or transfer of assets though a Will can help prevent potential problems for future beneficiaries. Now is the time to update your Will!
Don’t have a Will or haven’t updated yours in a while? Check to see if you’re eligible to do an Online Will with Canny Legal here: Online Wills
Superannuation + Inheritance Tax
Superannuation is treated differently from other assets in an estate because it is held in a trust structure.
The distribution of superannuation benefits upon death is primarily governed by the binding death benefit nomination and the discretion of the superannuation fund trustees, rather than the instructions in the deceased person’s Will. As such, superannuation considerations play a significant part of any estate planning.
When a superannuation fund member passes away, their superannuation benefits can be inherited by their dependents or nominated beneficiaries. The trustees of the superannuation fund hold the responsibility for determining how the deceased person’s superannuation benefits are distributed. They consider factors such as the binding death benefit nomination, the provisions of the fund’s trust deed, and relevant legislation. The trustees have discretionary powers to override a nomination if they have reasonable grounds to do so.
Want to know more about superannuation and the importance of binding death benefit nominations? Check out this blog we previously put together: Superannuation + Binding Death Benefit Nominations.
When deciding on the distribution of superannuation benefits, trustees typically consider the dependents and beneficiaries of the deceased member. They may consider factors such as financial dependency, personal circumstances, and the relationships of potential beneficiaries. It is their duty to act in the best interest of the beneficiaries and ensure compliance with legal requirements.
If a beneficiary or interested part disagrees with the trustees’ decision regarding the distribution of superannuation benefits, they may have the option to challenge the decision through dispute resolution processes or legal avenues, depending on the circumstances and applicable laws.
Taxation on superannuation benefits paid out to an estate or to a beneficiary can vary drastically and have many implications. If superannuation benefits are paid directly to the estate of the deceased person, they may be subject to tax. The tax treatment depends on whether the benefits are paid as a lump sum or as an income stream. If superannuation death benefits are paid directly to a beneficiary they may also incur unexpected outcomes should the benefits be taxable, such as paying an increased Medicare levy (not applicable in a deceased estate) or decreasing a family’s entitlement to Centrelink benefits such as family tax benefits.
Canny Accounting + Your Inheritance
It is no doubt that receiving an inheritance can be both a blessing and a responsibility. While Australia does not impose a specific tax on inheritances, it is essential to be aware of the potential tax obligations associated with inherited assets. Capital Gains Tax (CGT) may apply if you sell the inherited assets, and the tax treatment of inherited superannuation funds depends on several factors. Seeking professional advice from a qualified tax professional or financial adviser can help ensure compliance with the Australia tax laws and optimise your tax position when dealing with inherited assets.
Get in touch with our team today, to find out how we can assist and plan for any inheritances that might be planned for you.
