Australian Inheritance Tax

Australian Inheritance Tax – What Every Australian Needs to Know

Inheritance is often thought of as a gift, something passed down with love and hope from one generation to the next. But as financial planners, we know it’s more than just sentiment. It can be one of the most significant financial events in a person’s life, yet despite its importance, many Australians are still confused about inheritance tax and whether Australian inheritance tax even exists.

So let’s clear the air, Australia does not currently have a formal “inheritance tax”, but that doesn’t mean you or your beneficiaries are in the clear when it comes to taxes.

In this article, we’ll explore what “inheritance tax” means in the Australian context, the real tax implications when passing on assets or receiving an inheritance and how to plan ahead to protect your wealth and your family’s future.

What Is Inheritance Tax?

Let’s start with the basics. Inheritance tax, also known in some countries as estate tax or death duty, is a tax imposed on the assets passed from a deceased person to their beneficiaries. It’s common in countries like the United Kingdom and the United States.

Australia abolished its federal inheritance tax in 1979 and all states followed suit shortly after. Since then, there’s been no standalone tax triggered purely by the act of inheriting wealth.

However, other taxes still apply in many inheritance scenarios. These can include:

• Capital Gains Tax (CGT)
• Superannuation death benefits tax
• Income tax on certain inherited assets

Let’s unpack each of these.

Capital Gains Tax (CGT) on Inherited Assets

Capital Gains Tax isn’t a direct “inheritance tax,” but it often comes into play when assets like property or shares are inherited.

How CGT Works Upon Death

When someone dies, their assets are generally transferred to beneficiaries at their cost base, essentially the value at which the asset was originally purchased. The CGT clock doesn’t start again, but rather continues from when the deceased acquired the asset.

There’s good news though, there’s no CGT payable at the time of inheritance. The tax liability is typically deferred until the beneficiary sells the asset. Additional details on CGT can be found the ATO website. 

Example:

Let’s say your father bought a property in 1990 for $200,000 and passed it to you in his will. If you inherit the property in 2025 when it’s worth $1.2 million and you decide to sell it in 2027 for $1.3 million, you won’t pay tax on the $1.2M you inherited, but you may pay CGT on the $1.1M gain from the original purchase price to your sale price.

There are exceptions, such as the Main Residence Exemption, which may reduce or eliminate CGT if the inherited property was your parents’ primary home.

Superannuation Death Benefits Tax

Superannuation is another area where tax can quietly erode an inheritance, especially if you don’t plan ahead.

When a super fund pays a death benefit to a beneficiary, it may be taxed depending on:

• The type of benefit (lump sum or income stream)
• The components within the super (taxed or untaxed elements)
• Whether the beneficiary is a tax dependent

For further details, check out Super Death Benefits on the ATO website. 

Tax Dependents vs Non-Dependents

The ATO considers spouses, children under 18, and financially dependent individuals as tax dependents. These beneficiaries usually receive tax-free super death benefits.

However, if the beneficiary is an adult child (and not financially dependent), tax of up to 15% plus Medicare levy may apply to the taxable portion of the super. Further details on super death benefits can be found on this ATO page.

Strategy Tip:

If you’re approaching retirement, consider withdrawing your super and gifting it while alive, especially if your intended beneficiary is a non-dependent. This strategy needs to be weighed carefully with other tax consequences, which is where strategic financial advice is essential.

Income Tax on Inherited Income-Producing Assets

Inheriting assets like investment properties, term deposits, or business interests can generate income and that income is taxable.

Let’s say you inherit a rental property. You won’t pay inheritance tax, but the Rental Income must be reported on your annual tax return, and normal income tax rates apply.

Similarly, inherited shares may pay dividends. These, too, must be declared as income, even though the asset was gifted.

Estate Planning Considerations: Avoiding the Hidden Tax Traps

Many Australians assume that because we don’t have an official inheritance tax, they don’t need an estate plan. Unfortunately, that assumption can lead to unintended tax bills and disputes among beneficiaries.

Here are several smart strategies to consider:

1 – Review Your Superannuation Nominations

Ensure your Binding Death Benefit Nominations are up-to-date and correctly structured. Leaving your super to a non-tax dependent without a strategy could cost thousands in unnecessary tax.

2 – Consider Testamentary Trusts

A Testamentary Trust is a trust created through your will and activated upon your death. It can:

• Reduce the tax payable by beneficiaries (especially minor children)
• Protect assets from bankruptcy or relationship breakdowns
• Offer more flexibility in distributing income

3 – Use the Main Residence Exemption Wisely

If your home passes to a beneficiary and is sold within two years of your death, the capital gains may be exempt from tax. This rule has some complexity, so timing and documentation are key.

When Family Trusts Come Into Play

Family Trusts can be a powerful tool in multi-generational wealth planning, but they are not exempt from tax issues at death.

Assets held in trusts don’t technically form part of your estate, which can:

• Bypass probate
• Provide asset protection
• But… make things messy if not properly documented

International Inheritance Considerations

If you’re Inheriting Assets From Overseas, or leaving assets to overseas beneficiaries, Australian and international tax laws may intersect.

Some countries may still apply inheritance tax on their end (like the UK), and those receiving foreign income in Australia will need to declare it on their tax return.

The Future of Inheritance Tax in Australia

While there is currently no inheritance tax, the topic continues to surface in economic and policy discussions, especially as wealth inequality grows and government budgets face pressure.

Any reintroduction of inheritance or estate duties would likely come with exemptions and thresholds, but it could significantly change how Australians plan their estates. Keeping an eye on legislative changes and working with a proactive adviser can help you stay ahead.

Frequently Asked Questions (FAQ)

Important Disclaimer: The information provided in this article is general in nature and does not constitute financial advice. Please consult with a qualified financial advisor to discuss your individual circumstances before making any decisions.