Authorities impose inheritance tax on the value of an individual’s estate upon their death. However, no state or territory in Australia currently applies inheritance tax. This means that beneficiaries in Australia do not have to pay a specific inheritance tax on the assets they inherit.
Tax Obligations of Inheriting Assets
Although Australia does not have an inheritance tax, beneficiaries who inherit assets may still have potential tax obligations. Consider the following key points:
- Capital Gains Tax (CGT) When a beneficiary sells an inherited asset and realizes a profit, they must pay capital gains tax. The tax calculation is based on the capital gain, which is the difference between the selling price and the asset’s cost base.You must also note that CGT is triggered when the beneficiary sells the asset, not when they receive it.
- Rental Income Beneficiaries who inherit shares or property generating rental income must report and pay income tax on that rental income. The rental income is treated like any other and should be included in the beneficiary’s annual tax return.
- Income Generated by the Estate Until the executor of the deceased person’s estate finalizes it, the estate may continue to generate income. This income can include rental income from properties, interest income from investments, or any other income.If the beneficiary becomes entitled to receive this income, they are obligated to include it in their tax return and pay the applicable income tax.
- Super Death BenefitThe super death benefit is the distribution of a deceased person’s superannuation fund to the nominated beneficiary. The tax implications of a super death benefit depend on several factors:
- Dependency Status Whether the beneficiary is considered a dependent under tax law plays a crucial role in determining the tax treatment of the super death benefit. Dependents, such as spouses or minor children, generally receive more favorable tax treatment than non-dependents.
- Lump Sum or Income Stream The form in which the super death benefit is paid determines the tax outcome. Different tax rules apply if the beneficiary receives it as a lump sum payment compared to receiving it as an income stream over time.
- Taxable or Tax-Free Super Superannuation can be categorized as taxable or tax-free, depending on the deceased person’s preservation age and whether the super fund has already paid tax on the taxable component. The tax treatment varies accordingly.
- Age of Beneficiary and Deceased The age of both the beneficiary and the deceased person at the time of death impacts the tax treatment, especially for income streams. Different tax rates and thresholds may apply based on these ages.To determine specific entitlements and a super death benefit’s tax implications, the beneficiary should contact the super fund trustee. They will provide detailed information and guidance tailored to the beneficiary’s situation.
Tax Rate for Estates, if Applicable
In Australia, your tax on inherited assets depends on whether they contribute to your income.
The tax calculation takes into account two main factors:
- the income earned from the inherited asset
- the length of time since the inheritance occurred
Here are the key points to consider:
Tax Calculation in the First Three Years
During the first three years after the inheritance, the income generated from the asset is taxed at your individual income tax rates applicable at that time.
This means the income is subject to the tax brackets and rates that apply to your overall income during that period.
Additionally, the income from the inherited asset counts towards your individual tax-free threshold, which is currently set at $18,200.
Tax Calculation after Three Years
After the initial three years, the tax calculation for the inherited asset changes. Like individual income tax rates, the inheritance also receives a tax-free threshold.
Any income earned from the asset beyond this threshold is subject to additional tax rates.
Tax Rates Three Years After Inheritance
Remember that these tax rates apply specifically to the income earned from the inherited asset after the initial three-year period. The tax rates increase progressively as the taxable income from the inheritance rises.
| Taxable Income From Inheritance | Tax Rates |
|---|---|
| Up to $416 | 0% |
| Between $417 and $670 | 50% of the amount over the threshold |
| Between $671 and $45,000 | $127.50, plus 19% on the excess over the threshold |
| Between $45,001 and $120,000 | $8,550, plus 32.5 cents per dollar over $45,000 |
| Between $120,001 and $180,000 | $32,925, plus 37 cents per dollar over $120,000 |
| Over $180,000 | $55,125, plus 45 cents per dollar over $180,000 |
Considering Tax Implications
When deciding whether to hold onto an inherited asset or sell it, you should carefully consider the additional taxes that may be incurred.
As the income from the asset is subject to tax rates beyond the initial three years, you may need to evaluate whether the potential tax liability outweighs the benefits of retaining the asset.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.