Inheriting money and assets can be a significant and life-changing opportunity, however, it also brings on new challenges and complexities with changing goals and needs.
There are no inheritance or estate taxes in Australia, which means you won’t be taxed on the amount you inherit. However, you may have tax obligations for the assets you inherit, so it’s important to understand how these taxes work.
Inheriting money and assets
If you dispose of an asset inherited from a deceased estate, you may be required to pay capital gains tax (CGT) on any increase in value since the original owner purchased it. However, you may be entitled to a discount on this tax depending on how long the asset was held.
The CGT rules are set out in the Income Tax Assessment Act 1997 (Cth) and the Taxation Administration Act 1953 (Cth). These acts establish the conditions in which CGT is payable and the rates at which it is charged.
When inheriting an asset in Australia, capital gain or loss does not apply when the asset passes to the beneficiary or executor. However, CGT may apply when the asset is sold after the two-year exemption period has elapsed. The amount of CGT is based on the increase in the asset’s value from the date of the deceased’s death to the date of sale. A 50% discount on the capital gain may apply if the asset is owned by the beneficiary for over 12 months. There are exemptions for personal use assets and collectables that are purchased for less than $10,000 or have a market value of $500 or less.
Income tax applies as usual to any dividends or rental income from shares or property you inherit. This means that if you receive rental income or dividends from an inherited property or shares, you will need to include this income in your tax return and pay tax on it at your marginal tax rate.
Receiving income of a deceased estate
When a person passes away, their estate may continue to generate income until the estate is finalised. This income could come from various sources such as rental income, dividends from shares or interest from investments. This income is earned by the estate, not the deceased person, and therefore it becomes the responsibility of the estate to report and pay any tax due on this income. If you are a beneficiary of the deceased estate and you become entitled to receive income from the estate, you must include this income in your own tax return. This income is taxed at your individual marginal tax rate, just like any other income you receive.
It is the responsibility of the Legal Personal Representative (LPR) of the estate to provide the necessary information to beneficiaries to help them complete their tax returns. The LPR is responsible for managing the estate and ensuring that all taxes are paid correctly. They should provide beneficiaries with an Income Statement that shows the amount of income earned by the estate and the tax that has been paid or is owed.
It’s important to note that if you receive income from the estate, you may also be liable for other taxes such as capital gains tax if the estate sells any assets during the administration period. It’s always a good idea to seek professional advice from a tax accountant or financial advisor if you are unsure about your tax obligations as a beneficiary of a deceased estate.
Inheriting a Super Death Benefit
Superannuation pays a death benefit when someone dies. The tax obligations of a super death benefit depends on various factors, including:
- If you were a dependant of the deceased under tax law
- If it is paid as a lump sum or income stream
- If the super is tax-free or taxable and whether the super fund has already paid tax on the taxable component
- Your age and the age of the deceased person when they died for income streams.
It’s essential to contact the super fund directly to find out about your entitlement. They will be able to provide you with the necessary information about how the super death benefit will be taxed and what your options are.
Inheritance and estate taxes are not a concern when it comes to inheriting assets in Australia, but you may have tax obligations for the assets you inherit. Understanding how capital gains tax and income tax apply to your situation, as well as the tax implications of receiving a superannuation benefit, is fundamental.
Working with a financial planner can help you navigate these tax obligations and make informed decisions about how to use your inheritance.
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