When a loved one passes away, there’s financial affairs that need to be taken care of. Some are pretty straightforward such as notifying Centrelink, any relevant government departments and financial institutions. Others may be a little more complicated and require professional legal or financial advice.
If you’re a beneficiary, you may find yourself asking ‘do I have to pay tax on inheritance in Australia?’
While every situation is different, here are some common tax related matters you may find yourself having to deal with.
Keeping your Will up to date
Before we dive into tax matters, it’s probably a good time to remind you to keep your Will up to date. This is particularly important if you marry, divorce or remarry, your partner or spouse dies, or if your financial situation drastically changes.
Don’t have a Will?
Kelly+Partners offers strategic estate planning advice to ensure your estate is handled in the most financially efficient and tax effective way.
Do you pay an inheritance tax in Australia?
An inheritance tax, also known in other countries as a death tax or gift duty, is a tax levied against people who receive assets from the estate of a deceased person.
The Australian Tax Office (ATO) states:
‘There are no inheritance or estate taxes in Australia.
When a person dies, generally the person responsible for administering the deceased estate is the legal personal representative. This person may be an executor or administrator who has been granted probate or letters of administration by a court.
When a person dies, there are some important tax and superannuation issues for the legal personal representative and others dealing with the deceased person's tax affairs.’
So, while Australia currently imposes no inheritance taxes on deceased estates, that doesn’t mean there aren’t tax obligations for the executor of the estate to attend to.
Tax on superannuation death benefits
When a person dies and they have superannuation, their super will be paid out to their nominated beneficiary. This is called a super death benefit. Depending on who receives the benefit determines how taxes will be applied.
The ATO advises:
‘Different rules exist for who is a dependent when making a super death benefit payment (superannuation law) and the resulting tax treatment (taxation law).
Super law sets out who a death benefit is payable to and taxation law sets out how the benefits will be taxed.’
The ATO website has more information regarding who is considered a dependant under superannuation law and who is a dependant under taxation law.
If you want to leave your super to someone other than a dependant, you can contact your super provider to set up a binding death benefit nomination.
Taxing a super death benefit
Factors that determine how a death benefit is taxed are:
- if you’re a dependant – you can choose to be paid in a lump sum or as an income stream
- if you’re not a dependant – you can only be paid a lump sum and any taxable component will be taxed, regardless of the recipient’s age
- the dependent’s age
- if you receive the benefit as a lump sum or as an income stream – lump sum payments are generally tax-free, but payments made as an income stream may be subject to tax
- if the super is tax-free or taxable
Tax-free and taxable superannuation
While your super provider can tell you how much of your super is tax-free or taxable, it usually depends on the types of contributions you made.
Non-concessional (after-tax) contributions - made from income you’ve already paid tax on are tax-free when withdrawn from your super. This includes personal contributions made from your after-tax income unless you’ve already claimed them as a tax deduction.
Concessional (before-tax) contributions – made from income before you paid tax on it are taxable when withdrawn from your super account. These contributions include:
- super contributions your employer must make for you
- salary sacrificing into super
- super contributions you’ve already claimed as a tax deduction.
It’s worth nothing that super death benefits are normally paid according to the superannuation fund’s rules and not the deceased’s Will. If you want to have more control over your super funds, contact your provider to make the necessary arrangements.
Do you have to pay taxes on an inheritance that isn’t superannuation?
The tax you pay on any other inheritance will depend on the type of inheritance.
Capital Gains Tax (CGT)
CGT is only paid if you later sell the asset you received from a deceased estate. By the same token, if the executor sells an asset prior to handing out the funds to the beneficiaries, this may also attract CGT unless an exemption applies.
Other income received from a deceased estate
The ATO advises any income received as part of an estate will be assessed as normal income. This means you may have to pay more tax in the financial year you acquired the income.
You should be aware the tax is applicable in the year you were entitled to receive the income, not the year in which it was actually received. As the ATO describes:
‘if you were presently entitled to the deceased estate income on 30 June 2019 but did not receive it until September 2019, you are personally assessable on that amount in the year ended 30 June 2019, not in the year ended 30 June 2020.’
It’s never too early, or too late, to think about estate planning. Because, even though we don’t have to pay inheritance tax in Australia, other taxes may have a significant impact on your loved ones once you pass away. So, you and your family will be better off if you get things sorted before it’s too late.
Consider seeking professional financial advice. Contact one of the team at Kelly+Partners to schedule a session to make sure you’re aware of taxes that may arise from the passing of a loved one.