“…in this world nothing can be said to be certain, except death and taxes.”
Benjamin Franklin
A popular, if grim saying, attributed to Mr Franklin, which reminds us that there are peculiar consequences in Australian tax law when it comes to deceased estates and inheritances.
Whilst there are no death duties or inheritance taxes in Australia (that’s the start and end of the good news), that does not mean that there are no tax implications to work through when a family member passes away. This is a complex area of tax law and in many instances deceased estates can take 12months or longer to finalise.
As implied above, death does not trigger a tax obligation per se, however there may be significant tax implications depending on what the beneficiaries do with any assets inherited from the deceased. This article aims to provide an overview of these obligations from the point of view of a beneficiary in receipt of an inheritance which includes financial and property assets.
Types of Inheritances and Relevant Tax Obligations
An inheritance may take many forms, with the main types including financial assets such as proceeds from a bank account, a death benefit payout from a superannuation fund, shares in listed companies, and of course, real property assets.
What you do with your inheritance will give rise to three common tax obligations being;
1. Income Tax
Tax is not payable on the transfer of assets from the deceased to beneficiaries in most cases, however, tax is payable on future earnings from any such assets. For instance, interest earned on cash at bank, dividends from shares and rental income from real estate.
2. Tax on Superannuation Death Benefits
Tax is often payable on a superannuation death benefit that you inherit. This would depend on a variety of factors, including your age, whether you were a dependant of the deceased (which has special meaning and definition under tax law), whether the payment includes taxable components and whether the payment is made as a lump sum or an income stream.
3. Capital Gains Tax
CGT is perhaps the most complex of the three common tax obligations noted above. Capital gains tax is often payable when a beneficiary sells an asset previously transferred to them from a deceased estate. As noted above, tax is not paid upon receipt of an inheritance, even if that includes the transfer of shares or real estate from the deceased. Instead, tax is usually payable upon the disposal of such assets. However, there are important exemptions that may apply depending on a number of factors which are listed below.
Key Factors Affecting CGT on Inherited Real Estate
- Whether or not the deceased was a tax resident of Australia at the time of their death
- Whether or not you were a tax resident of Australia at the time of receiving an inheritance from Australia even more complex rules apply if the asset being disposed is real estate.
- Whether or not the deceased occupied the property as their main residence immediately prior to their passing,
- How long you’ve kept the property after receiving the inheritance.
- It is imperative that you obtain professional advice based on your personal circumstances should you decide to sell an inherited asset.
Understand Tax Obligations and Review Your Financial Strategy
It is advisable to have both your lawyer and accountant involved when drafting a will. This is vital to avoid unexpected liabilities. If you need advice regarding the best way to manage your tax affairs, including those arising from an inheritance then speak to the team at LZR Partners.
Whenever you receive a significant windfall, especially from an inheritance you should review your investment strategy with a professional financial advisor. If you need advice as to how best to invest an inheritance, then speak to the team at LZR Advisory. They will help you decide how best to use or invest these funds to meet your current and future needs.
In a future article we will consider this topic from the point of view of the administrator of a deceased estate and offer some insights on the value of estate planning (including the use of testamentary trusts).
