There’s nothing wrong with thinking about leaving something for your loved ones when you pass away. However, asset management plans are often not considered while thinking about something so important.
Without well-thought-through asset planning, things could become extremely complicated and may become a more stressful burden than financial support.
While a lot of countries all around the world impose inheritance tax, there is none in Australia. In simpler terms, the value of the deceased estate isn’t automatically impacted by mandatory taxes.
However, the absence of inheritance tax (or estate taxes) does not mean you get away with all the tax obligations. So, here in this guide, we have accumulated all the information you would need when it comes to asset inheritance and the taxes you may have to pay in regard to them.
When do Tax obligations of inheriting assets apply?
There are certain circumstances where you will be subject to tax obligations. As a beneficiary of an Estate, the following may have a considerable impact on your taxes:
- Earning income from a deceased person’s estate;
- Capital gains tax (CGT);
- Superannuation death benefits
Capital gains tax
Although the property received in your inheritance will not be taxed, capital gains tax (CGT) will be applied if you choose to sell it in the future. Under the following couple of instances, you might be exempt from paying CGT:
Disposal within 2 years
You would be surprised to know that you won’t need to pay capital gains tax on the inherited assets if you dispose of them within 2 years of acquiring them. The property will completely be exempt even if it was used by you to produce income or used as your main residence. (To know more about this exemption, please refer to the official website of the Australian Taxation Office)
Main residence while owning the property
For this, you must meet the following requirement (from the day of the deceased’s death until the disposal of the property):
The property isn’t used to generate income; and
It is the main residence of at least one of these people:
- the individual who has a right to occupy that property under the deceased’s will
- the individual (beneficiary) who disposes of the property as a beneficiary
- the spouse of the deceased right before the deceased death (not a permanently separated spouse)
You can use the ATO’s website to learn more about such exemptions.
Super death benefit
When an individual who invested in a superannuation fund passes away, the fund may directly be given to the nominee had the individual made a Binding Death Benefit Nomination.
The beneficiary who receives this payout may have to pay taxes on these funds. Whether the tax applies to the super death benefit or not will depend upon the following:
- Was the benefit paid in an income stream or lump sum?
- Is the beneficiary a dependent?
- If the super is tax-free or taxable?
- The age of the deceased when they passed away and that of the beneficiary.
What about non-residents?
In case the beneficiary is a non-resident of Australia, the tax-free law does not apply to them. The amount they have to pay as taxes will be decided as per the taxation laws of the country where they are a resident.
What does the Executor of the Will do?
As an Executor of the Will, you will (most likely) have the responsibility of lodging the last personal tax return on behalf of the deceased. Besides personal tax returns, you may also need to lodge the estate tax return (if required).
These two together will have a huge impact on the value of the estate left that is to be distributed among the beneficiaries.
How much money can I inherit without paying inheritance tax in Australia?
By now, it is clear that there is no official inheritance tax in Australia. Still, the assets inherited may contribute to an individual’s income tax or may require them to pay capital gains tax on them.
If you are trying to figure out your tax obligations under such circumstances, the following would need your attention the most:
- The type of asset you are to inherit (cash, property, shares and gifts)
- Value of each asset
- How the asset will be paid (lump sum or regular recurring payment)
- Your current asset management plans and financial situation (current income, tax obligations, expenses and debts)
If you want to best manage the tax obligations when it comes to inheritance, you should reach out to a professional, like a tax accountant. With Clear Tax Accountants, you will be relieved of any worry related to such taxes.
Does inheritance count as income in Australia?
Receiving an asset as an inheritance is not generally considered a part of your income (thanks to the absence of inheritance tax in Australia), which includes cash lump sum, shares and properties.
However, while the estate is being administered, such assets can generate income themselves. The income generated in this case may be taxed, no matter if it is in the beneficiary’s or estate’s name. Here are a couple of such scenarios:
- If the inherited super death benefit is paid as an income stream, such an amount may be taxed.
- If the inherited property generates income for you (through selling, renting or using it for income generation taxable income), it may be taxed.
When the inherited property is used as the main residence, in most cases, it will be exempt from paying tax.
When can I expect to get my inheritance?
As a beneficiary, you can expect to receive your inheritance within a year (12 months) of the demise of the testator (the one who made the will). Although it is expected for the executors to finalise an estate within this period, it may take more time for cases with complex estate administration or when legal claims are made.
The responsibility of administering a deceased estate falls on the shoulders of the executor of a will. It involves:
- Collecting all assets and property
- Paying debts (it includes the estate’s tax liabilities)
- Distributing assets as per the will
Once the executor distributes the net estate to the beneficiaries as per the will, the estate gets finalised. While the estate administration is still going on, the executor has to take care of any taxes on the net income of the estate before it is completely administered unless any beneficiary is presently entitled.
Generally, beneficiaries are not presently entitled to the income of the deceased estate unless it is completely administered. However, if the income is distributed to the beneficiaries before administration, they become presently entitled to it.
How much tax do you need to pay on inheritance?
Since the lack of inheritance tax in Australia does not mean you can get away with your tax obligations, here’s how much tax you will be paying on inheritance. The following two factors will help you determine the amount of tax you will pay:
- The amount of money you made from the asset
- The time that has passed after the inheritance
You will be taxed at your individual income tax rates for the first three years. Just like your individual income tax rates, there’s also a tax-free threshold for inheritance. After the three years pass, additional tax rates apply.
By now, it must be clear that Australia has no official inheritance tax or estate tax. However, the distribution of such assets may still have a significant financial impact on beneficiaries. Due to this, having careful strategic asset management becomes crucial to reduce any financial burdens on the beneficiaries.
In case you need any assistance with calculating your taxes or understanding your tax obligations, you can reach out to Clear Tax accountants. Here you will be met with professionals who will make tax time easier and stress-free for you.
Disclaimer: The information on this website is for general purposes only and should not be relied upon for making legal or other decisions. The advice provided in this article is general in nature and is not subject to the personal financial situation and needs of any individual. Clear Tax tries to keep the information accurate and up-to-date; however, you should bear in mind with changing circumstances, the accuracy and reliability of the information will not necessarily remain the same. The information is by no means a substitute for financial advice.