When you’re in the process of planning your estate, it’s important to consider the tax implications your assets might have on your beneficiaries. One thing to consider is inheritance tax. In this guide, we outline everything you need to know about inheritance tax in Australia.
What is inheritance tax?
Inheritance tax is a levy against the value of your estate. Most countries worldwide impose this tax which requires beneficiaries to pay inheritance tax. Currently, Australia does not have inheritance tax in any of the states or territories.
What are the tax obligations of inheriting assets?
Even though Australia doesn’t technically have an inheritance tax, beneficiaries may still have tax obligations if they are entitled to income earned by the inheritance. Here are a few examples of when tax obligations may apply:
- Capital Gains Tax. If you sell an asset that you inherited and make a profit, you are subject to capital gains tax in Australia.
- Rental Income. Income tax applies if you make any rental income from shares or property.
- Income generated by the estate. Until the executor finalises the estate, it can continue to make an income. Therefore you would need to include it in your tax return.
If you have super, the beneficiary entitled to the super death benefit may also need to pay tax on the income earned. This depends on whether the beneficiary is a dependant, if it was paid in a lump sum or if the super is tax-free.
Super Death Benefit
After you pass away, the proceeds of your super fund go to a person you nominate to receive your Super Death Benefit. The beneficiary who inherits this payout may need to pay taxes on those funds. Whether or not tax applies to the super death benefit depends on the following:
- Is the beneficiary a dependent?
- Was the benefit paid in a lump sum or an income stream?
- Is the super taxable or tax-free?
- What is the beneficiary's age and the deceased when they passed away?
What amount of tax do you pay on inheritance in Australia?
The amount of tax you pay on an asset you inherit depends on whether it contributes to your income. If it does, then two factors determine how much tax you need to pay:
- How much money do you make from the asset
- How much time passes after inheritance
For the first three years, the income is taxed at your individual income tax rates that you pay at that time. After that, similar to individual income tax rates, the inheritance also receives a tax-free threshold. Then, after three years, additional tax rates apply.
In Australia, there is no official inheritance tax. However, assets that beneficiaries receive can still have tax obligations. To help you offset any tax obligations, consider creating a testamentary trust. By planning your estate, you can save your loved ones unnecessary time and stress.