Inheritance tax in Australia. What to know

The death of a loved one is hard, and for those closest to them that grief is often processed alongside having to deal with the estate. As part of the estate, provisions are made for assets to be passed on to people who played a significant part in the person’s life, but what are the implications of this when it comes to finances?

To help, we’re going to break down what there is to know about inheritance tax in Australia. We’ll look at what inheritance tax is, the current Australian Taxation Office (ATO) rules on inheritance tax, and some specific situations like whether the Australian superannuation death benefit is taxed and how inheritance tax works if you’re based overseas.

💰 Wise provides you the mid-market exchange rate and transparent transfer fees shown upfront.

Learn more about
Wise money transfers

Note: This article is purely for general information purposes and is not to be taken as financial advice. We recommend that you obtain independent legal and financial advice before making any form of decision.

Table of contents

What is inheritance tax? Inheritance tax in Australia Inherited superannuation death benefit Dependents Dependents under superannuation law Dependents under tax law Death benefits paid as an income stream Death benefits paid in a lump sum Foreign residents Capital gains tax on property you inherit Foreign residents Do you need to declare inheritance on your tax return? Are you taxed on inheritance if you transfer it abroad? United States General questions on inheritance tax in Australia Do you have to pay tax on inherited cash in Australia? When was inheritance tax abolished in Australia? Am I taxed on inheritance I bring into Australia? Send money overseas the Wise way

What is inheritance tax?

Speaking in general terms, inheritance tax is a tax that’s charged on the assets of a deceased estate, such as property, possessions and money. If and how it is applied varies depending on the country and local tax laws, and it can be quite complex to understand, especially if there are different thresholds, exemptions and tax rates.

Inheritance tax in Australia

Australia doesn’t have an inheritance or estate tax, but you might have other tax obligations that arise from the assets you inherit, such as property or superannuation.¹

What those obligations are will depend on your relationship to the deceased and how the asset is transferred or paid out. Your status as a resident or non-resident of Australia for tax purposes can also play a part.

Inherited superannuation death benefit

When someone passes away their superannuation is paid to a dependent beneficiary or the trustee of the deceased estate in the form of a superannuation death benefit.²

The superannuation death benefit can be taxable in certain circumstances, depending on who’s receiving the benefit and how it’s being paid.

Dependents

One of the key factors is if the person is considered a dependent. The definition of a dependent under Australian superannuation law is slightly different to taxation law.

Dependents under superannuation law

Based on the superannuation laws in Australia, this is who can be paid a death benefit while being considered a dependent.

• Spouse or de facto spouse of the deceased
• Child of the deceased (any age)
• Person in an interdependent relationship with the deceased

Dependents under tax law

Under Australian taxation laws, this is who’s considered a dependent when determining if the death benefit will be taxed or not.

• Spouse or de facto spouse of the deceased
• Former spouse or de facto spouse of the deceased
• Child of the deceased (under 18)
• Person financially dependent oh the deceased
• Person in an interdependent relationship with the deceased

There are also some considerations if the deceased dies in the line of duty while serving in the defence force, Australian Federal Police, state or territory police force or as a protective service officer.

Death benefits paid as an income stream

If the death benefit is paid as an income stream, the proportioning rules are used to decide how much is tax free and how much is taxable.

In the event that a death benefit income stream is being paid to a dependent child, you must stop paying the income stream and pay the remaining amount as a tax-free lump sum either on or before they turn 25. The only exception is if there’s a permanent disability to consider.

Death benefits paid in a lump sum

When a death benefit is paid out as a lump sum, the taxation amount will vary depending on who it is being received by. If the lump sum benefit goes to a dependent it’s all tax free, but if it goes to a non-dependent then the tax-free and taxable component are calculated for each benefit paid out using the proportioning rule.

• If all beneficiaries are not dependents there’s 15% tax on the taxable component, 30% tax on the untaxed element and the tax free component has no tax
• If there is a mix of dependents and on-dependents then a proportionate approach to tax needs to be taken

If you’re facing a situation where the payment of the superannuation death benefit is more complex, it’s a good idea to reach out to the superfund or contact an industry professional to ensure you’re receiving the correct advice for your particular circumstances.

Foreign residents

If the beneficiary is a foreign resident for Australian tax purposes, they’re still treated the same as a tax resident because the death benefit is considered Australian income. The only exception is if the person is a tax resident of somewhere that has a double tax agreement with Australia.

Capital gains tax on property you inherit

In general capital gains tax (CGT) doesn’t apply when you inherit an asset as an individual, but it can apply when you sell it.³

• Assets that aren’t property revert to the normal CGT rules
• Property can be exempt from tax under the main resident exemption
• A collectable or personal use asset can be exempt for CGT if it was purchased for less than the threshold for that type of item

When CGT does apply, the base cost it’s worked out from could be based on the value when the deceased person came into possession, or when they died and it became an inherited asset.

Foreign residents

If the asset passes to someone who’s a foreign resident, CGT applies if these conditions are met.

• The deceased acquired the asset on or after 20 September 1985, when CGT was introduced
• They were an Australian resident when they died
• The asset is not considered a taxable Australia property in the hands of a foreign resident

When Australian capital gains tax does apply for assets inherited by foreign residents, the gain or loss is worked out using the market value at the date of death and the cost base or reduced cost based at that date.

Do you need to declare inheritance on your tax return?

If your inheritance is taxable, for example a capital gain or loss, then it needs to be declared on your tax return. Remember, if you’re ever uncertain there are tax professionals, accountants and financial planners who may be able to help.

Are you taxed on inheritance if you transfer it abroad?

If you’re an overseas resident then you’ll need to check what the local laws are regarding inheritance tax and whether there are any double tax agreements in place between that country and the Australian government.

No matter what country you are in, inheriting from an estate in another country can have its complexities so it’s best to consult an expert to ensure all obligations are met.

United States

As an example, if you’re living in the United States you’re required to report any bequests from a nonresident alien or foreign estate that exceed the aggregated threshold of $100,000 in a taxable year.⁴ It is usually exempt from IRS tax but there may be some state taxes that apply.

General questions on inheritance tax in Australia

Here’s a few FAQs about Australian inheritance tax.

Do you have to pay tax on inherited cash in Australia?

No, currently Australia doesn’t have inheritance tax so there’s no tax on inherited cash.¹

When was inheritance tax abolished in Australia?

At a federal level Australian inheritance tax was abolished in 1979 and by 1982 all of the states had removed any relevant sections of the tax system as well.⁵

Am I taxed on inheritance I bring into Australia?

The answer to this can be a little tricky depending on what it is you’ve inherited so check out our full guide on bringing inheritance money into Australia to get a more in depth answer.

Send money overseas the Wise way

Send money with Wise and you get the mid-market exchange rate, which means no surprise mark-up on your currency conversions. Fees are clear, shown upfront and secure.

Wise is a specialist in sending large amounts overseas, securely. The added bonus is that with a sliding fee scale, the more you send, the more you save. The exchange rate is always based on the mid-market rate.

In Australia, Wise is regulated by the Australian Securities and Investments Commission (ASIC) and holds an Australian Financial Services Licence (AFSL number 513764).

It’s super easy to arrange a payment with Wise. Once your account is approved, you can set one up in minutes, without the need to visit a physical branch in person.

Join over 16 million customers currently enjoying Wise. It’ll only take a few minutes to register and see what’s inside.

Register your Wise account
in minutes

Please see Terms of Use and product availability for your region or visit Wise Fees & Pricing for the most up to date pricing and fee information.

This article is purely for general information purposes and is not to be taken as financial advice. We recommend that you obtain independent financial advice before making any form of decision.

---

Sources:

1. ATO - If you are a beneficiary of a deceased estate
2. ATO - Paying superannuation death benefits
3. ATO - How CGT applies to inherited assets
4. IRS - Foreign gifts and bequests
5. Forbes - Do you pay tax on inheritance in Australia?

Sources checked on: 25 October 2024