Inheritance tax, death tax & estate tax in Australia

We all want loved ones to benefit from our estate, and even though there is no formal inheritance tax in Australia, there are times when an inheritance can be subject to tax.

When a person passes away, there can potentially be a number of financial matters for their loved ones to take care of. Some of these – such as working out any possible tax implications – can be complex, and you may need advice from a qualified advisor based on the specifics of the situation and the people involved. But to help you understand how things work generally, here’s an overview of some of the tax-related matters you may encounter.

Is there an inheritance tax in Australia?

Australia hasn’t had a true inheritance tax – or ‘estate’ tax (sometimes referred to as a ‘death tax’), for the last few decades. That being said, there may still be some tax considerations for the deceased person’s representatives (e.g. the executor of the deceased estate) to tend to, such as potentially needing to complete a date of death tax return. In addition, there are a handful of taxes and levies which can potentially apply to sums of money and other assets passed from a deceased person to their dependents or other nominated beneficiaries.

Here’s an overview of how these taxes may work, depending on your circumstances. Bear in mind that tax and super can be complex topics, so you may want to seek help from a taxation or financial adviser.

Taxation of superannuation death benefits

You may have strong views about who inherits your superannuation savings when you die. However, tax on your super is an important issue to consider.

The Australian Taxation Office (ATO) advises that super paid after a person’s death is called a ‘super death benefit’.

Does an inheritance tax apply to super you leave behind? That depends on who inherits your super. More specifically, factors such as whether the beneficiary is a dependent or not, along with their age and whether they receive the benefit as a lump sum or income stream can play a part in determining how the benefit is taxed.

In addition, the ATO explains that a super death benefit can be made up of tax-free and taxable parts. The ATO clarifies that the tax-free component can include after-tax contributions and government co-contributions, whereas the taxable component can consist of things like employer contributions and salary sacrifice contributions.

While several different factors can influence how a superannuation death benefit is taxed, there are a handful of general rules to keep in mind, according to info available from the ATO:

• Payments to non-dependent beneficiaries of the deceased person can only be made in the form of a lump sum, whereas a dependent may receive either a lump-sum or income stream.
• If the benefit is paid to a non-dependent, generally the taxable portion of it will be subject to tax, regardless of the recipient or deceased person’s age.
• While a super death benefit paid to a dependent will generally be entirely tax-free if paid as a lump sum, it may be subject to tax if it’s paid as an income stream, although exceptions could apply in some situations.

It’s worth noting the ATO’s advice that super death benefits are typically paid based on the governing rules of the deceased’s super fund, not their will. However, it also states that an individual can potentially exert a higher level of control over who their super death benefit goes to once they die. Specifically, the ATO suggests you may be able to:

• Make a to ensure your super balance goes to the individual of your choice and is taxed accordingly, or
• Arrange to have the super balance placed in a superannuation proceeds trust.

Taxation on other types of inheritance

Unlike superannuation death benefits, other types of inheritance are normally distributed based on the deceased person’s will, according to Moneysmart. How any taxation may apply will generally depend on the type of inheritance in question. Here are a couple of examples of how it could work for inherited assets and income derived from an estate.

Taxation of inherited assets

The ATO advises that capital gains tax (CGT) is only paid in the event that an asset received from an estate is later sold. In this case, the ATO says you would potentially be required to pay CGT on the proceeds of the sale. However, if the estate’s executor sells an asset to someone else before distributing the proceeds to you, then this sale may attract CGT, unless an exemption applies.

Taxation of income derived from an estate

The ATO advises that any income you are entitled to, and receive, as a beneficiary of an estate is assessed as normal income, meaning that it could potentially increase the amount of income tax you have to pay. However, it is assessed in the year the entitlement arose, rather than the tax year in which you received the income.

Regardless of what stage of life you’re currently at, it may benefit you to seek expert advice and consider writing a will to specify how your estate and its proceeds are distributed.

Additionally, if you’re going to be a beneficiary of an estate, it may be worth seeking expert advice on how this could affect your tax affairs. And if you think you may soon become the executor of an estate, it may be prudent to seek legal advice on how to best distribute the assets.

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Additional reporting by Nicola Field and  James Hurwood.

Cover image source: eelnosiva/Shutterstock.com.