It can be uneasy thinking about inheritance. As well as dealing with the passing of a loved one, it also requires someone to think about their will, estate, and how to ensure their wealth gets distributed in the way they requested.
Putting a thorough plan in place ensures that when the time comes, the process is made as easy as possible. It helps you navigate the rocky road ahead—while ensuring you stay on the right side of the ATO.
Liston Newton Advisory are here to guide you through the legal and financial process, and deliver advice that covers your entire financial and family situation. So when you’re ready for estate planning advice and support, contact us to book your free strategy session.
When planning for your family’s financial future, you want to make sure that they’re looked after once you’re no longer in the picture. But if you’re considering leaving behind an inheritance, it’s critical that you plan it the right way. Otherwise, you run the risk of having the ATO take a large portion of what the beneficiaries of your estate should receive.
When it comes to estate planning and inheritance, the short, honest answer is that every situation is different, so we can’t provide blanket advice that covers all bases. However, there are a few common scenarios that you may encounter. So let’s have a look at what these are, and what it means for your estate planning.
Do you pay taxes on an inheritance?
The short answer to whether Australia has an 'Inheritance Tax' is: no. Here in Australia, there is no such thing as an Inheritance Tax. However, the tax paid on superannuation death benefits is sometimes colloquially referred to as a 'death tax'.
But while you aren’t taxed on an inheritance, as such, there still may be tax obligations of which you need to be aware. These can include:
- Capital gains tax;
- Super death benefits;
- Earning an income from a deceased person’s estate; and
- Being a non-resident beneficiary.
There are still obligations of a deceased estate that need to be administered. This takes us back a step, which means ensuring your Estate plan is set up correctly. And, more specifically, ensuring a will is in place.
Assuming the Will is addressed, this then formulates which assets enter the deceased estate, and how they need to be managed.
Does inheritance count as income?
We have to make a clear distinction here. Receiving an asset as an inheritance typically isn’t counted as part of your income. This includes things like a cash lump sum, property, or shares.
However, if it takes time for the estate to be administered, these assets can still generate an income themselves. This income may be taxed, whether it’s in the estate’s name or the beneficiary’s name. In this circumstance, it’s recommended you seek professional advice when the estate is being administered.
An important part of an inheritance is the deceased’s superannuation. Under superannuation rules, the deceased has the option of having this paid out to a nominated beneficiary. This is known as a Superannuation Death Benefit.
This too can be considered an inheritance—but depending on who is nominated to receive the benefit, it may end up being taxed. It all depends on whether the beneficiary is a dependent or not. This is clarified as:
- A surviving, or former, spouse;
- A child of the deceased and under the age of 18;
- Someone who is financially dependent on the deceased; or
- An interdependent relationship with the deceased existed.
Once identified, the taxation of the super benefit can then be determined. This is based on how the benefit is paid, and;
- Whether or not the super is taxable, or considered tax-free.
- The age of the beneficiary.
- Whether or not the beneficiary is a dependent. If so, they can choose to be paid in an income stream, or as one lump sum. If not, they’re only eligible to receive a lump sum, and any taxable component will be taxed.
Typically, lump-sum payments are received tax-free. An inheritance received as an income stream is likely to be taxed.
Navigating capital gains tax within inheritance
Navigating capital gains tax within an inheritance can also be a confusing situation, if not undertaken with the correct guidance.
Usually, a property that’s received as part of an inheritance won’t be taxed. But if you choose to sell it later on, then CGT still applies. That is, unless:
- You sell any inherited property within two years of receiving it; or
- You’re a direct dependent, and you decide to use the property as your main place of residence.
In these situations then your sale is typically exempt from CGT.
What to do when dealing with non-resident beneficiaries
Deceased estates get complex when the beneficiary is a non-Australian resident.
There are a series of rules that apply to how the tax of a non-resident beneficiary is treated, which must be adhered to. If there’s a non-resident beneficiary involved in an estate, we recommend seeking professional advice.
What’s the difference between estate tax and inheritance tax?
While Australian residents don’t pay inheritance or estate tax on a received inheritance, many other countries do.
An estate tax and inheritance tax are effectively the same things. It’s a direct tax payable on the total value of a deceased person’s money and property, which is paid to the government prior to the beneficiary receiving their distribution. It can be quite high. In the UK, for example, residents are liable to pay a 40% inheritance tax.
The final word
As we’ve identified above, there’s no such thing as inheritance tax in Australia. However, different taxation situations may apply to your inheritance, and these all depend on the nature of the inheritance itself.
Estate planning isn’t something many people want to do. But by creating a clear plan for managing your inheritance, you’re putting steps in place to ensure your family and beneficiaries are looked after for the future.