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In many parts of the world, when a person dies and passes on their assets to someone else, the person to whom it was bequeathed is required to pay tax on the value of those assets.
Australia’s federal estate tax was abolished in 1979, and every state had eliminated the equivalent ‘death duty’ tax system by 1982.
Three years later, capital gains tax was introduced as an alternative. Its aim was to generate public revenue in a way that was more practical and equitable. Capital gains tax is paid when an estate is sold and a profit is realised, rather than a person’s death triggering a tax bill.
For example, under the inheritance tax regime, if a farmer died and passed on his farm to his daughter, a sudden tax bill could be difficult for her to pay. After all, ownership of the farm has simply changed hands: it has not produced any windfall of cash to provide liquidity.
Capital gains tax is paid if the person who inherited the asset sells the property. Even then, there is a two-year exception period on capital gains tax on assets passed through an estate. If the farm was sold within two years of the farmer’s death, capital gains tax can be avoided.
Inheritance Tax Explained
As mentioned, Australia no longer has a dedicated inheritance tax. Nonetheless, beneficiaries may have tax obligations if they are to receive an income from the inheritance asset. This could include rental income on an investment property that they receive under the will.
“There are only limited circumstances where a beneficiary of a will would need to pay tax,” says Harrison Dell, a tax lawyer at Cadena Legal. “The most common is if they are a non-tax resident. If you’re an Australian who lives in Australia and you receive either property or money from a will, you won’t pay any tax.”
The most common scenario he sees is when a parent dies and their child is living and working overseas. They will be required to pay tax on the inheritance. This exception to the rule was devised as a way of preventing assets being passed outside Australia simply to avoid tax obligations.
How Is Inheritance Taxed In Australia?
Queensland was the first state in Australia to abolish inheritance tax after the federal regime was scrapped in 1979. One of the reasons it did so was due to the financial hardship it created among farming communities. Farmlands possess a high market value with a low rate of return and farms purportedly had to be sold or carved up to be able to pay the ‘death duties’. This was particularly true when say, first a father died and then his wife, leaving their children to face two large tax bills.
Some people, meanwhile, created trusts to avoid paying inheritance tax.
“Inheritance tax was abolished because tax evasion was blatant and widespread,” says Dell. “It was also too hard to administer, made too little money and put stresses on the wrong people.”
“People were avoiding it relatively easily by creating trusts or putting assets in companies, so it wasn’t even generating a much tax revenue while hitting farming communities hardest.”
Inheritance tax was abolished because tax evasion was blatant and widespread
Once Queensland abolished inheritance tax, other states moved swiftly as families started moving their wealth to the ‘tax haven’ of Queensland.
Tax Obligations When Receiving Inheritance
When receiving an asset that will produce an income, such as a rental property, tax must be paid on the income. There is no tax on the value of the asset itself—only the income derived from it. If you receive shares, you are required to pay tax on the dividends you receive.
The tax that needs to be paid on rent income or share dividends is generally calculated from the date that the person died and passed on the asset.
Super Death Benefit
A superannuation death benefit is a payment made by a super fund to a dependent beneficiary or trustee of the deceased estate when the fund member passes away.
The dependents is usually their spouse, child or someone they had a long-term relationship with, such as a carer.
“If it’s paid to a dependent, it’s tax free,” says Dell.
The definition of a dependent includes a spouse (legal or de-facto), children (regardless of age), someone who was financially dependent on the person at the time of their death, and someone who was in an interdependency relationship with the deceased.
How Much Tax Will I Pay On My Inheritance?
“Usually, no tax will be paid on your inheritance,” says Dell. “In reality, there may be dribs and drabs of it. If there’s a bit of income that’s flowed through the estate, or you received a superannuation death benefit and you’re not a dependent, then some tax will be owed.”
If you live overseas at the time a parent dies and passes on their assets, you may need to pay tax and should obtain legal advice.
Bottom Line
There is no dedicated inheritance tax in Australia, so you will not be required to pay tax on the value of an asset that you receive through a will.
However, if an asset generates an income, you will need to pay tax on it.
If you subsequently sell a property that was passed onto you, you must pay capital gains tax. The major exception is if you sell the property within two years of the death of the person from whom you inherited it.
Frequently Asked Questions (FAQs)
When was inheritance tax abolished in Australia?
Australia’s federal estate tax was abolished in 1979. By 1982, every state had scrapped these so-called ‘death duties’.
Which countries have inheritance tax?
Some twenty-four out of 38 OECD countries have an inheritance tax, including the United States, United Kingdom, Belgium, Denmark, South Korea, Finland, Germany, France, Japan, Greece and Hungary.
Jurisdictions that have repealed inheritance tax laws include Australia, Canada, New Zealand, Singapore, Hong Kong, Malaysia, Mexico and Norway.
Should I declare inherited assets on my tax return?
There is no need to declare inherited assets on your tax return.
However, if you are receiving any dividends or rental income from shares or property you have inherited, it is important to declare it because it forms part of your income tax.
“The ATO is adept at determining whether an individual began receiving a rental income from an investment property, so make sure that you declare it,” says Harrison Dell, a tax lawyer at Cadena Legal.
