Australia does not have an inheritance tax. When a person dies, the estate, or person who inherits the assets does not have to consider any special inheritance tax on the money or assets that are taking ownership of. While a beneficiary may be required to pay taxes from Superannuation death benefit payments, or capital gains on the sale of assets that have been inherited if those assets are sold, there is no specific tax levied on the value of inherited assets.
However, there are many countries that do have inheritance taxes, including the United Kingdom.
This means that when an Australian inherits money or assets from abroad, they may find themselves subject to an unfamiliar “inheritance tax”.
What is inheritance tax?
In a similar vein, estate taxes are levied on the value that is paid out of a deceased’s estate. The estate is required to pay these taxes, rather than the beneficiary. This means that the beneficiary receives the net assets after the estate has paid any required.
In some countries these taxes are referred to as “death duty”.
The laws around inheritance taxes vary between tax jurisdictions. There may be different tax rates, different inclusions on what type of assets are taxed and different types of exemptions or limits.
Some countries like the United Kingdom levy inheritance taxes where assets are transferred to trusts and for this reason many British expats should seek inheritance tax advice before establishing a trust in Australia.
When would an Australian resident be required to pay Inheritance taxes?
As an Australian resident you are not subject to inheritance tax, regardless of where the inheritance is coming from. However the deceased estate may be subject to estate taxes prior to paying or transferring your inheritance to you.
In essence this means you, as an individual taxpayer, do not have to be concerned about being assessed for specific inheritance taxes.
What taxes does an Australian need to be aware of when inheriting assets from overseas?
1. Ongoing earnings from the inherited estate
When you receive money from an inheritance you may be subject to taxation on any of the amounts that have been earned as income, and were not already taxed within the estate. This is because a deceased individual may continue to gather income after their date of death. If there is a delay between the date of ownership of the estate assets being transferred to you and the physical transfer of such assets to you then you may personally be assessed on such income. The executor of the estate would make you aware of any income amounts that this may apply to.
Furthermore, any ongoing income that you earn from inherited assets will be taxed under ordinary taxation laws. For example, if you inherit a business, you will be subject to any income tax on the ongoing business earnings once the business has been transferred to you. If you inherit an investment property then you will be subject to income tax on the ongoing rental income that you earn once the property has been transferred to you.
Since we are talking about inheritance from an overseas estate, it is important to note that you may also continue to be subject to taxes in the country in which the inherited asset is located. In this situation most countries have a double tax agreement with Australia which will typically ensure that you are limited to paying taxes based on the country that has the highest income (or capital gains) tax rate.
2. Capital Gains Tax
Sometimes a deceased estate may be liquidated so that the beneficiaries are simply paid out in cash. Other times beneficiaries may be bequeathed assets such as property, shares, a family business, collectables, or other assets.
Under Australian Capital Gains Tax laws the date of death is typically used as the date you acquired the asset, with the market value of the asset at this point in time being your cost base. This means that when you eventually sell the asset you will be subject to capital gains tax on any capital gain made on this sale.
There may be some exclusions. For instance if you inherit a family home and move into or continue to live in that home, then you may be exempt from capital gains under the main residence exemption.
3. Superannuation Death Benefits
A superannuation death benefit may be paid to you as a lump sum or an income stream. Typically a lump sum death benefit is tax-free where you were a dependent of the deceased. If you were not a dependent, or you receive a superannuation death benefit income stream, then you may be subject to taxes on part of the death benefit, depending on the components of the benefit paid.
4. Bringing money into Australia
If you have inherited cash from an overseas estate you also need to be aware of the impact of transferring funds from overseas into Australia.
Foreign currency can be treated as a CGT asset. This means that when you withdraw money from an overseas bank account you are triggering a taxable event. This is because exchange rate valuations fluctuate and there can be a difference between the value of what you originally inherit and the value of what ends up in your Australian bank account, purely because of these exchange rate fluctuations.
This means that you may be taxed on any increased value of the overseas money, from the time of inheritance to the time the funds are transferred to your Australian bank account.
Inheriting money from overseas
In simple terms, inheriting money from an overseas estate is similar to inheriting money from within Australia. While you will not personally be assessed on inheritance taxes, you do need to consider other taxes based on the ongoing benefits earned through the inheritance.
The biggest difference is the added complications that inheriting from overseas may impose, including:
- Potential capital gains tax on exchange rate fluctuations when withdrawing foreign currency
- Estate taxes imposed on the estate that are paid prior to distributing your inheritance
- Foreign taxes imposed on continuing to hold onto any foreign assets or investments
Once you receive the inheritance the assets or money received are yours. This means that their ongoing use and benefit are assessed, where applicable, in your hands, just as any ordinary assets or finances that you earn or invest in yourself, would be.