Inheritance tax is a levy imposed by the government on a deceased estate. This means beneficiaries in line for an inheritance have to pay the government tax before they receive their share of the estate.
Australia does not have inheritance tax in any of its states or territories. This means that the value of the deceased estate is left untouched by law.
Unless you are advised by the executor of the Will, you will not have to pay tax for any assets you receive from the estate. For instance, if you inherit any of the following, you are exempt from any direct tax:
However, there are still tax obligations you may need to meet depending on the circumstances. If you are the Beneficiary of an Estate the following elements may impact the total value of your inheritance.
Capital gains tax (CGT) – when you dispose or sell an asset at a profit, capital gains tax applies;
whether you were a dependent on 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 provider has already paid tax on the taxable component;
Your age and the age of the deceased person when they died (this will impact income streams).
Earning an income from the deceased’s estate.
Additionally, if you are non-resident beneficiary the amount of tax you pay will depend on what agreement your country of residence has with Australia for tax purposes.
If you are the Executor of the Will may you will have the financial responsibility of lodging the final tax return on behalf of the deceased person, which could impact the total value of the Estate.
While there is no official inheritance tax, any assets you inherit may contribute to your income tax or result in capital gains taxes. To minimise the amount of tax that you will pay, it is recommended that you seek advice from a professional who can assist you in reducing your tax obligations.
If you are seeking ways to minimise 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 payment or lump sum.
Your current financial situation – current tax obligations, income, and expenses.
Your current financial status – your income and revenue.
To determine whether assets you inherit from a deceased estate as classed under your income you must first consider your own personal tax obligations, and how your financial position will be impacted once you receive the inheritance. There are many factors that determine if inheritance is taxed. For instance, the following scenarios could apply:
If you inherit a super death benefit and it becomes an income stream, the death benefit will 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 will be taxed.
If you inherit a property and you use the property as your main residence (if you’re a dependent).
The amount of tax you pay when you inherit an asset (that contributes to your income) will depend on how much money you make, and how much time has passed since the person’s death.
For the first three years, the income from the deceased estate will be taxed at the individual income tax rates. The individual income tax rates are the taxes that you pay personally as an individual.
Just like individual income tax rates, the estate will receive the benefit of a tax-free threshold. For example, if you inherited a deceased estate which earned income of $18,200 or less, there will be no tax payable.
Then, after the three years, if the deceased estate continues to be administered, the following tax rates will apply:
Tax rates 2020-21 and 2021-22
Source: The Australian Taxation Office
Deceased estate taxable income (no present entitlement)
50% of the excess over $416
$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%.
$8550 plus 32.5 cents for each $1 over $45,000
$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
Although Australia does not have an official inheritance tax, the distribution of someone’s assets can still have a major impact on beneficiaries. Beneficiaries of a deceased estate may be liable to Capital Gains taxes, taxes for Superannuation death benefits or taxes on any income they make from the deceased estate. It is also important to remember that obligations that apply to beneficiaries differ if the recipient is not an Australian resident or is defined as incompetent.
That’s why careful planning is crucial on behalf of the testator to try and minimise any financial burdens on their beneficiaries upon their death. Creating a testamentary trust is one way you can try and offset the taxes paid on deceased estates. By planning ahead you can save your family a lot of time and stress in the long-term. We advise seeking advice from a professional lawyer or accountant to help you navigate the tricky world of taxation in the estate planning process.