In Australia, there are currently no official inheritance taxes or estate taxes imposed by the federal or state governments. When a person passes away, the beneficiaries who inherit assets under a will are not required to pay tax on the value of the estate. However, while there is no direct tax on the inheritance itself, there may still be tax obligations for the estate and the beneficiaries.

Do you pay tax on inheritance in Australia?

No, there is no direct inheritance tax in Australia. Since the abolition of inheritance tax in 1979, beneficiaries do not need to pay taxes upon inheriting money, property, or other assets from a deceased person's estate. However, this does not mean you're necessarily free from other tax obligations when dealing with inherited assets.

Depending on the assets you inherit, different taxes may eventually apply.

For example, Capital Gains Tax (CGT) may become payable if you sell inherited property or investments and make a capital gain.

Or if you receive income from an inherited rental property, this is considered assessable income and subject to income tax.

Superannuation death benefits may also have a taxable component, potentially creating a tax liability.

Understanding these tax implications is essential, and seeking professional advice can help ensure compliance with Australian tax law, including any taxes payable on income streams or lump sum payments.

Receiving income from a deceased estate

While a deceased estate is being finalised, it may still generate income, such as rental income from property or earnings from investments. If you're entitled to receive this income before the estate is fully settled, it must be included in your tax return. This income is considered assessable and should be reported for the year in which you receive it.

The Legal Personal Representative (LPR) of the estate is responsible for managing the estate’s affairs and will provide you with the necessary details regarding the income. It’s important to include this information in your tax return for the relevant tax year to ensure compliance with tax law. Properly declaring this income can help avoid any tax liabilities and penalties.

Do you pay tax on superannuation death benefits?

Superannuation payments made after a person's death, referred to as super death benefits, can be subject to tax depending on various factors. The relationship between the beneficiary and the deceased plays a significant role in determining the tax treatment.

If you are a tax-dependent (such as a spouse, child under 18, or financial dependent), you may receive the superannuation death benefit tax-free, regardless of whether it’s paid as a lump sum or income stream. However, if you are not a tax-dependent, a portion of the super death benefit may be taxable, particularly the taxable component, and the tax implications may vary based on how the benefit is paid (as a lump sum or an income stream).

The age of both the deceased and the beneficiary can also affect the tax treatment of income streams from the superannuation fund. It's essential to contact the trustee of the deceased’s superannuation fund to determine your entitlements, understand the applicable taxes, and ensure you meet your tax obligations under Australian tax law.

How does Capital Gains Tax apply to inherited properties?

When you inherit an asset such as property or shares, you may need to pay Capital Gains Tax (CGT) if you sell it for a profit. It's important to note the obligation to pay CGT arises not at the time of inheritance but when you sell or dispose of the inherited asset. The amount of Capital Gains Tax payable is determined by the sale date, not the date you acquired the asset from a deceased estate.

Several factors affect how much tax you’ll pay, including the asset’s cost base, which is typically its market value when the deceased person acquired it, the price at which you sell it, and the length of time the deceased held the asset. Once the inherited asset is sold, CGT is assessed based on any capital gain.

What about income tax on inherited assets?

When you receive dividends from shares you’ve inherited, it's essential to report all dividend income on your tax return, even if you reinvest the dividends to purchase more shares. The Australian Tax Office considers dividends as assessable income, and you're required to pay tax on them in the year they are received. If the dividends are franked, meaning the company has already paid tax on some of them, you may be eligible for franking credits to offset your tax liability. Additionally, if you sell the shares, any profit or loss must also be reported for Capital Gains Tax (CGT) purposes.

For rental income from an inherited property, you're required to declare all rental payments as assessable income, including any income derived from overseas properties. If the property is jointly owned, you only need to report your share of the rental income and associated expenses on your tax return. Similarly, when selling the property, any capital gain or loss must be reported to the Australian Tax Office, and you may be liable for CGT based on the property’s market value at the time of sale. Be sure to stay aware of these tax obligations to avoid any unexpected liabilities.

Are there special tax rules for non-resident beneficiaries?

Yes, non-resident beneficiaries may face additional tax obligations when inheriting assets from an Australian estate. If you're living outside Australia, you could be subject to higher Capital Gains Tax (CGT) rates, especially when selling inherited property. Non-residents are often not eligible for certain tax concessions available to Australian residents, which could increase the tax payable on any capital gains or income derived from the assets.