Inheritance Tax in Australia: Everything You Need To Know

Most people plan to leave something to their loved ones when they pass away. Luckily, Australia does not have inheritance tax. Meaning that the value of the deceased’s estate is not automatically impacted by any mandatory taxes.

However, if handled incorrectly, estate taxes could get in the way of your planned actions. Ultimately minimising how much your estate's beneficiaries receive.

Today we explore how effective organisation of an asset management system in life can work in the interest of your loved ones in death- maintaining the integrity of your wishes, protecting your money, and saving your beneficiaries from having to pay inheritance tax unnecessarily.

When tax obligations applies

There are still circumstances where tax obligations may still apply. If you are the beneficiary of an Estate, the following elements may impact the total value of your inheritance:

• Whether an estate tax return needs to be filed, to declare any income earned by the estate prior to distribution and finalisation;

• Capital gains tax (CGT) – whilst there are various concessions and
  exemptions for deceased estates, these can vary depending on how the
  property was owned and used by the deceased;

• Superannuation death benefits – depending on how these entitlements are
  paid by the Trustee of the super fund, funds received from superannuation
  death benefits may need to be declared as income in the recipient’s
  personal tax return, and this will depend on:

  • Whether you were classified as a dependent of the deceased under taxation law;

  • Whether the benefit was paid as a lump sum or as an income stream;

  • Whether the super is tax-free or taxable;

  • Whether the deceased had already paid tax on the taxable component.

For non-residents?

Additionally, if you are a beneficiary who is not a resident of Australia, the tax free law may not apply to you. And the amount of tax you have to pay may depend on the taxation laws in the country where you are a resident.

Role of the Executor of Will?

If you are the Executor of the Will, you may have the responsibility of lodging the final personal tax return on behalf of the deceased person, if required, and/or an estate tax return, both of which could impact the value of the Estate left to be distributed to beneficiaries.

How much money can you inherit without paying inheritance tax?

While there is no official inheritance tax, any assets you inherit may contribute to your income tax or may require you to pay capital gains tax. To best manage your tax obligations, it is recommended that you seek advice from a professional, such as an accountant or financial planner.

If you are trying to best understand your tax obligations, you will need to consider the following:

• Type of asset you will inherit – including cash, shares, property, and gifts;

• Each asset’s value;

• How the asset will be paid – either as a regular recurring payment or lump sum;

• Your current financial situation & asset management plans– current tax obligations, income, debts, and expenses.

Is inheritance classed as income in Australia? Do beneficiaries have to pay taxes on inheritance?

To determine whether assets you inherit from a deceased estate are classed as income, you must first consider your own personal tax obligations- as well as how your financial position will be impacted once you receive the inheritance.

There are many factors that determine if inheritance is taxed, including what you choose to do with the assets that you inherit. For instance, the following scenarios could apply:

• If you inherit a super death benefit and it is paid as an income stream, the
  death benefits may be taxed.

• If you have inherited a property, and you receive income from that
  property (by renting it out, selling it or using it to generate tax income) it
  may be taxed.

• If you inherit a property and you use the property as your main residence,
  it is likely to be exempt from any tax

If you're a beneficiary and this applies to you, you might be left wondering how much this tax will cost you. And similarly, how any effective asset management system could help minimise this risk that you will be taxed on inheritance.

What percentage of tax does an estate pay, if required?

For the first three years, any income that the estate earns will be taxed at the individual income tax rates. The individual income tax rates are the same taxes that you pay personally as an individual.

Just like individual income tax rates, the beneficiary of the estate will receive the benefit of a tax- free threshold. For example, if the estate earned income of $18,200 or less in the financial year, there will be no tax payable.

Then, after three years, if the deceased estate continues to be administered, the following tax rates will apply, as per the Australian Taxation Office 2020-21 and 2021-22 rates:

Deceased estate taxable income (no present entitlement)

Tax Rates

- $0-$416 Nil

- $417-$670 50% of the excess over $416

- $671-$45,000, $127.50 plus 19% of the excess over $670.

If the deceased estate taxable amount exceeds $670, the entire amount from $0 will be taxed at the rate of 19%.

$45,001-$120,000 $8550 plus 32.5 cents for each $1 over $45,000

$120,001-$180,000 $32,925 plus 37 cents for each $1 over $120,000

$180,001 and over $55,125 plus 45 cents for each $1 over $180,000

Final Considerations

Although Australia does not have an official inheritance tax, the distribution of someone's assets can still have a major financial impact on beneficiaries.

Beneficiaries of a deceased estate may be liable for Capital Gains Taxes (CGT) and taxes on superannuation death benefits. Or, the estate may need to pay tax on any income earned.

It is also important to remember that taxation obligations that apply to beneficiaries differ if the recipient is not a resident of Australia for tax purposes. That’s why a careful strategic asset management plan is crucial to minimise any financial burdens on their beneficiaries upon their death.

Creating a testamentary trust is one way you can try and offset the inheritance tax paid on deceased estates. This allows you to pass on and control inheritance via rental income or physical assets, without the cost of paying taxes upon the acquisition of these assets.

Regardless of how you do it, planning ahead can save your family a lot of time and stress in the long-term. Maintenance and organisation of your assets can also have benefits when it comes to building generational wealth, and making your money resources work for your objectives in life.

We advise seeking advice from a professional lawyer or accountant to help you navigate the tricky world of taxation both during the estate planning process, and after a loved one's passing.

How can Safewill Legal help?

This article is brought to you by Safewill’s affiliate law firm, Safewill Legal. If you need to apply for a Grant of Probate or Letters of Administration for a loved one’s estate, our team of specialist Wills and Estates lawyers can assist you with the process, from start to finish. Safewill Legal can also assist with estate planning advice, including preparing bespoke Wills.

Our local team can readily provide you with complimentary guidance about where to start. Reach out on our live chat or call us on 1300 942 586.

Disclaimer: The information contained in this guide is not intended to be a substitute for legal advice but as a basic guide to the application process. If you have concerns or queries you should consult a legal professional about your specific circumstances