Inheritance Tax & Tax Effective Estate Distribution in Australia

During the administration of a deceased person's Estate, assets and funds can transfer:

• from the Estate to a Beneficiary;
• from the Estate to you as the Executor, Administrator or Next of Kin in trust; or
• from the Executor, Administrator or Next of Kin to a Beneficiary.

In each of these instances different tax rules may apply and the timing of paying those taxes and by who can vary.

The Australian Taxation Office (ATO) defines the following types of taxes that may apply to a Deceased Estate or Beneficiaries:

• Income Tax;
• Capital Gains Tax; and
• Company Tax.

28.2.1 Income Tax

Income tax is payable by an entity who is required to pay tax in Australia on all moneys earned through:

• a salary
• interest
• rental income
• investment returns
• dividends
• business or partnership income
• income from overseas etc.

28.2.2 Capital Gains Tax

Capital Gains Tax (CGT) applies at the time when an asset is sold. The difference between the purchase or inheritance value compared to the final sale value after deducting all costs associated with the sale (legal fees, settlement fees, stamp duty agent fees etc.) will be taxed. Capital Gains Tax forms part of a person's or entity's income tax when declared.

Examples where CGT may apply are:

• real estate sale
• land sale
• shares sale etc.

An asset that is sold for less than its purchase value or inheritance value is considered to have resulted in a Capital Loss. In this instance all capital losses can be deducted from any capital gains by the same asset owner in the same financial year. Where no capital gain applies in that particular year, the loss can be deferred to a future year.

28.2.3 Company Tax

In Australia, the company tax rate is 30%. However, if the company generates less than $50m aggregate turnover and less than 80% is generated through passive income, the lower company tax rates of 26% (for 2021/22 financial year) or 25% (from 2021/22 financial year onward) apply. The deceased person may have owned and run their own business, which may be sold or handed over to a Beneficiary. The new owner of the business will need to ensure that company tax is paid going forward.

Other taxes that are not listed here may apply in your situation. We recommend you seek tax advice to fully understand your circumstances. simplyEstate can help you seek experienced support for your questions or you can contact one of our Trusted Partners listed to the right or below.

There is no inheritance or gift tax payable in Australia, meaning that Beneficiaries who inherit or are gifted money or assets do not need to pay a tax at that time based on the inheritance value.

The inheritance value is the value as per the deceased person's date of death. If you as the Executor or Administrator have valued all assets as outlined in Steps 15 – 26, you may be asked to provide the valuation report(s) to the relevant Beneficiary when the assets are distributed. Refer to Step 34 – Finalisation & Distribution of Estate to Beneficiaries for further information.

The following types of assets may attract taxes:

• Cash;
• Real Estate – Distributed to a Beneficiary;
• Real Estate – Sold During the Estate Administration Process;
• Other Capital Assets;
• Income; and
• Superannuation.

28.3.1 Cash

You may have asked yourself: “Is a cash inheritance taxable in Australia?”

Cash that is inherited will in most cases not be taxed as it will not be classified as income for the recipient or attract any Capital Gains Tax at the time when it is transferred from the Deceased Estate to the Beneficiary.

However, once the money earns interest on the Beneficiary's account, the money is invested and provides returns or where the inheritance is paid as income via a trust on a regular and ongoing basis, income taxes may start to apply to the Beneficiary.

28.3.2 Real Estate – Distributed to a Beneficiary

Any real estate property that will pass to a Beneficiary as part of the Estate distribution will not incur Capital Gains Tax for the Estate nor the Beneficiary at the time of transfer.
However, two exceptions to this rule apply and Capital Gains Tax may apply where

• that inherited property is sold by the Beneficiary after two years; or
• that inherited property is passed to a Beneficiary who lives outside of Australia.

If the property is sold by the Beneficiary who inherited the property at a later stage, a few rules help to determine if Capital Gains Tax would apply after the sale.

Refer to the ATO website for more details where properties were inherited before 21 Aug 1996 and if the deceased person passed away before 20 Sep 1985. Other exceptions may apply, and it is advised to seek tax advice to confirm what applies to your specific situation.
To determine if a partial exemption applies, please consult the ATO website or seek tax advice.

If a Beneficiary wants to sell the inherited property within two years but are unable to do so for reasons outside of their control, the ATO may grant an extension to ensure the same rules apply. Some valid reasons may be:

• the completion of the Deceased Estate administration is delayed;
• the Executor, Administrator or Next of Kin who is supposed to administer the Deceased Estate is unable to do so due to illness or injury and is expected to delay beyond the two-year period;
• the Will or the property's ownership is challenged; or
• the settlement cannot be achieved by the end of the two-year period.

If a Beneficiary resides overseas, it is strongly recommended to seek advice in relation to the Deceased Estate's as well as the Beneficiary's tax implications.

28.3.3 Real Estate – Sold During the Estate Administration Process

The Executor, Administrator or Next of Kin administering the Deceased Estate may need to sell a property during the administration process. This could be for various reasons including but not limited to:

• the need to monetise an asset to pay debts on behalf of the Estate;
• the need to sell a large asset if the real estate makes up the largest part of the Estate and it cannot be split between Beneficiaries or they are unwilling to take on a real estate jointly;
• the need to sell a large asset if none of the Beneficiaries is willing to take on a real estate due to reasons such as the inability to service the mortgage, maintenance costs etc.; or
• agreement with the Beneficiaries to monetise all assets to distribute cash only.

In the above situations, Capital Gains Tax applies at the time of sale and should be included in the deceased person's tax return as outlined in Step 32 – Preparing the Deceased Estate Tax Return – Death & Taxes.

Any costs incurred during the sale process can be deducted from the Deceased Estate.

The Capital Gains Tax is calculated based on the difference between the property value on the date of death (when the property transfers from the deceased person) and the initial purchase value.

Note: Capital Gains Tax will not apply on most personal assets including the home, car and furniture. If you sell other assets such as investment properties as part of the Estate administration, you need to note that the date you enter into a contract of disposal will determine which financial year the CGT needs to be disclosed, and not the date of settlement.

28.3.4 Other Capital Assets

Other capital assets apart from real estate are:

• cars
• shares or stocks
• bonds
• art collections etc.

Similarly, to the information provided above about real estate, CGT will only apply at the time of sale and will need to be declared by the owner at the time of sale and in the financial year where the sale contract is signed.

28.3.5 Income

If during the administration process the Deceased Estate is generating income such as interest on bank accounts, rent on investment properties, investment dividends and returns etc. in the deceased person's sole name, then income tax applies. As outlined in Step 32 – Preparing the Deceased Estate Tax Return – Death & Taxes, a tax return will most likely need to be prepared for both the deceased person (known as a date of death tax return) and the Deceased Estate.

28.3.6 Superannuation

As outlined in Step 24 – Claiming Deceased's Superannuation Death Benefit, a Death Benefit may not necessarily form part of the Deceased Estate. Generally speaking, a Death Benefit is paid to a dependent person in form of a lump sum or a super income stream.

As per the INCOME TAX ASSESSMENT ACT 1997 (Cth) Section 302.195 (Austl.) (accessed 27/1/2021), a dependant is one of the following:

• spouse or former spouse of the deceased person;
• child of the deceased person, aged under 18;
• a person with whom the deceased person had an interdependency relationship with just before passing; or
• a person who was a dependant of the deceased person just before passing.

If the superannuation is paid to a non-dependent person, such as a child of the deceased aged 18 or more, a Death Benefit can only be paid as a lump sum and may be taxed up to 32% (as at Sep 2018) on the taxable component.
In this situation we recommend you seek tax advice to determine when and how much tax is payable by the Estate.

Where the deceased person held a Self-Managed Super Funds (SMSF), you should seek tax advice to determine the tax applicable to the Estate.

Depending on your specific circumstances, the exact tax implications and what you agree with the Beneficiaries, you will need to decide if it is better to:

• distribute the assets to the eligible Beneficiaries;
• sell all assets and distribute cash to all eligible Beneficiaries;
• sell part of the assets and distribute assets and cash; or
• set-up a post mortem trust that holds all assets to benefit all eligible Beneficiaries over a longer period

Where the Will had requested for a testamentary trust to be created that holds part or all the deceased person's assets, this should be dealt with as outlined in the following Step 29 – Opening a Testamentary Trust per the Will.

For Deceased Estates valued over $100,000 it is recommended to seek tax advice to fully understand the tax elements of each asset to determine how to best structure the Estate for distribution.

You should have a good idea about any income taxes and capital gains taxes payable from the Deceased Estate prior to distributing to the Beneficiaries. It is recommended to keep aside sufficient funds in the Deceased Estate to pay any tax liability when due.
To do this, you will need to have determined how you structure the Deceased Estate, which assets will be transferred directly to Beneficiaries and which will be sold by you on behalf of the Estate, so the cash proceeds can then be distributed.

We recommend you seek tax advice to ensure your planned structure and distribution complies with all tax requirements. simplyEstate has partnered with Tax Accountants across Australia to help you answer your questions. See to the right or below for their details.

All debts that are secured by an asset of the Deceased Estate, will generally transfer to the Beneficiary who inherits that asset. This means if a real estate still has a mortgage both the real estate and the related mortgage will transfer to the Beneficiary and the mortgage will not be paid by the Estate. Hence the real estate value should always be viewed in terms of net value or equity value (asset value – (minus) associated mortgage or debt value).