Did you know that there is no inheritance tax in Australia? The State and Federal governments do not tax the value of a deceased estate, and beneficiaries of a Will do not require to pay a tax on their entitlement.
While there is no direct tax on inheritances, beneficiaries may come across tax obligations for:
- The net income on the inherited property before an executor administers it to beneficiaries,
- The beneficiaries after they receive their inheritance,
- Executors must understand the tax obligations arising while administering a deceased estate and for the beneficiaries to be aware of the financial consequences of the inheritance.
In this blog, you will learn practical and relevant information on crucial tax considerations when deceased estates are administered and then inherited.
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Does One Pay Inheritance Tax in Australia?
No, one does not have to pay tax on inheritance in Australia. Unlike many countries across the globe, Australia does not impose tax obligations on deceased estates or beneficiaries inheriting assets under a Will.
Although there is no inheritance or estate tax in Australia, beneficiaries must consider their tax liability once they receive their inherited assets and take ownership. Moreover, an executor must also be aware of the tax obligations of administering a deceased estate.
Inheritance Tax Obligations on Estate
Although there is no direct estate tax in Australia, there may be tax implications for a deceased estate if it earns income before an executor administers and distributes it to the beneficiaries. Tax is payable by an estate in the first three income years, where it generates income, and in income year four or later, tax is payable on all estate income.
In tax evaluations, estates are similar to trusts, and executors are responsible for paying tax on net income derived before the inheritance before they finalise and distribute it unless beneficiaries are presently entitled to that income.
Types of estate income are as follows:
- Superannuation Death Benefit payable to the inheritance
- Employment termination payments
- Non-exempt Capital Gains
Tax Rates Applicable To Deceased Estates
The following are the Tax Rates applicable on deceased estates:
- Individual Tax Rate for the first three income years
- Including the tax-free threshold
- The tax rate is concessional
- Tax Rate for income years four and later
Different tax rules apply where an executor distributes estate assets to:
- The beneficiary under a legal disability
- Foreign residents
- Charities and Super Funds
Once an executor collects all assets, pays debts, and settles any tax liability, then distributes the net estate to the beneficiaries of the Will. The process finalises the inheritance, and the beneficiaries are now responsible for tax obligations from inheriting estate assets.
Tax Obligations on Beneficiaries in a Will
When beneficiaries inherit assets under a Will, they will be entitled to take ownership of the estate assets. While there is no tax on the value of the entitlement, owning the assets may imply certain personal tax obligations.
Personal tax obligations depend on the following factors:
- Asset type
- Usage of asset
- Asset transfer or sale
After the beneficiary gets ownership of the asset, regular tax rules apply. Moreover, the beneficiary will then be required to evaluate the use of the inheritance or how its subsequent sale impacts their assessable income.
Super Death Benefits
A Super Death Benefit is payable to a beneficiary nominated in a Will or a dependant of the deceased under the Super Law. These funds do not form part of the inheritance, and monies are paid directly to the beneficiary entitled to the Will. They are responsible for the tax liability.
The ATO (Australian Taxation Office) website states that the tax on a Super Death Benefit depends on the following factors:
- Are you a dependant of the deceased?
- Is the amount paid as a lump sum or income stream?
- If the super is tax-free or taxable, and if the testator has already paid tax on the component.
- Age of the beneficiary and the deceased person when they died.
As per superannuation law, a death benefit-dependant includes:
- child of the deceased (any age)
- the deceased’s spouse or de facto spouse
- a person in an interdependency relationship with the deceased
Moreover, under taxation law, a death benefit-dependant is:
- a person financially dependent on the deceased
- a person in an interdependent relationship with the deceased
- the deceased’s spouse or de facto spouse
- the deceased’s former spouse or de facto spouse
- a child of the deceased under 18 years old.
When is the Super Death Benefit Paid to the Estate?
An executor distributes a superannuation death benefit to the deceased person’s estate in case of:
- A binding nomination to do so
- A non-binding nomination to a beneficiary, where the Trustee of the Super Fund pays the estate using their discretion.
- No nomination where the Trustee of the Super Fund pays the estate instead of the dependant.
In Australia, one does not need to pay inheritance tax, but the assets that beneficiaries receive may still have tax implications. You can consider creating a testamentary trust to help you offset any tax obligations. With inheritance planning, you can save your loved ones unnecessary time and stress. Executors must understand the tax implications that arise during the asset administration of a deceased estate. Beneficiaries must also be aware of the financial impacts of inheriting estate assets. You can consult a Probate service for resources on information on Grants of Representation and deceased estates.
If you are an executor or the next-of-kin and need a Grant of Probate or Letters of Administration, speak to an expert for consultation. If you wish to learn more about inheritance tax-related laws, next of kin meaning or have other inheritance-related queries, contact Probate Consultants today!