How tax works when giving or receiving an inheritance

For many, leaving something behind to help out our loved ones after we pass is extremely important. However, if handled incorrectly, tax can often take a large chunk out of what the beneficiary receives. Here’s what you need to know, whether giving or receiving an inheritance, to ensure the most is made out of the gesture.

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Is there an inheritance tax in Australia?

No. Australia doesn’t have inheritance or death tax in any of its states or territories, meaning that the net total of the deceased’s estate is left untouched under law. However, there are still tax obligations that might apply to your situation. Being aware of them helps ensure the best possible scenario moving forward.

So what areas do you need to think about when it comes to tax and inheritance?

• Super death benefits
• Earning an income from the deceased’s estate
• Capital gains tax (CGT)
• Non-resident beneficiary

Inheritance money is meant to help you provide for your loved ones, even after you’re gone.

Estate planning for your beneficiaries

Many people find comfort in knowing they can help their loved ones, even after they’ve passed. Estate planning is about creating a strategy for doing just that, including how you can set up your Will and other legal instruments to manage any tax obligations as efficiently as possible. This allows you to ensure you’re giving your loved ones as much as possible and minimising any issues on their end.

For example, if you have any of the following, having an effective estate plan takes the stress and worry off of your loved ones after you’ve passed:

• A family business
• An SMSF
• Capital losses
• Property with some capital gains

One of the most important factors in minimising the amount of potential tax involved with distributing your estate is having a valid Will. In the document, you name an executor, whose duty it is to ensure your wishes and estate are dealt with properly after you’re gone. The executor deals with any tax obligations on your side prior to administering your Will, such as filing your tax return and paying any income tax you owe.

Not only does a Will allow you to choose who inherits what, but it also provides you with the opportunity to set up a testamentary trust.

What is a testamentary trust?

A testamentary trust is a trust that comes into being when you pass away and is created via a legal document, such as a Will. It holds specified assets as dictated by you, and a trustee you’ve nominated oversees it. Depending on your situation and needs, you can set up more than one testamentary trust so you can create the right provisions for different beneficiaries.

Should you consider a testamentary trust?

Not everyone needs a testamentary trust. However, if you’re concerned about how tax may impact an inheritance you’re giving a loved one, it’s important to discuss whether one might help with a trusted advisor. For example, it can assist in dealing with capital gains on any taxable income that results from the sale of property you owned.

Receiving an inheritance

While the executor handles any tax obligations on the deceased’s behalf, there are still some obligations that you may have to deal with on your end when receiving your inheritance.

But first, are you a dependant?

Many of the tax scenarios surrounding an inheritance change contingent on whether Australian tax law considers you as a dependant of the deceased. This relies upon you fulfilling one of the following requirements:

• You’re a surviving, or former, spouse.
• You’re a child of the deceased and under the age of 18.
• You’re financially dependent on the deceased.
• You had an interdependent relationship with the deceased.

If you’re receiving an inheritance, whether or not you have tax obligations to consider often depends on if you’re considered a tax dependent.

What you need to know about superannuation death benefit tax

Not all an individual’s assets are legally dealt with via a Will. For example, whom a superannuation death benefit is released to isn’t controlled by the legal document. Instead, it depends on the trustee of the superannuation fund or the binding death benefit nomination made by the individual, if there is one.

If you are receiving the death benefit, how it is taxed depends on whether it’s paid out as a lump sum or an income stream.

As a lump sum:

• You won’t pay tax if you’re legally considered a tax dependent.
• If you’re not a dependant, you will have to pay tax on the lump sum. How much you’ll pay will depend on the taxed and untaxed elements involved with the amount you’re receiving.

Drawn as an income stream:

• You can only choose this option if you’re a dependant. Leaving the money in super and receiving it as an income stream means you’ll likely have to pay tax on it. How much depends on the age of the deceased and yourself, as well as the taxed and untaxed elements.

Inheriting property and the capital gains tax (CGT)

There is no tax if you receive property as part of an inheritance. However, if later on you sell or dispose of it you need to consider the possibility of CGT. Once more, much rests on whether you’re considered a tax dependent of the deceased. It’s wise to discuss how you should proceed with dealing with any property you’ve inherited with a knowledgeable advisor. They can assist in creating a strategic long term plan so you can make the most out of what you’ve received.

However, two ways of dealing with property that you’ve inherited that don’t involve CGT include:

• Selling any inherited estates within two years of the deceased’s passing.
• Choosing to use the property as your main residence if you’re a dependant.

Another factor to consider is whether you’re receiving an income from a deceased estate. There are a variety of factors to consider in this scenario that may impact whether you need to pay tax on the money you’re inheriting.

If you’d like to make sure you’re setting up an inheritance or receiving one, in the most tax-efficient manner, make sure you reach out to the expert financial advisers at Invest Blue.

What you need to know

This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.

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