Does an Estate or Death Tax exist?

In Australia, there is a common misconception that a blanket “death tax” or “estate tax“ exists.  There are no inheritance or estate taxes per se, however, estates and beneficiaries alike may still have tax obligations related to certain assets.

Income Tax

Just like regular Australian citizens, estates are subject to tax on income and capital gains generated from assets such as rental properties and shares. Income tax is payable by the estate from the date of death until the estate is wound up. Estates have the benefit of the regular adult marginal tax rates and tax free thresholds in the financial year of death and the subsequent two financial years.  Less attractive estate tax rates apply thereafter.

As a beneficiary, if you inherit an asset that produces taxable income, it may impact your overall tax position.

Capital Gains Tax (CGT)

Just by inheriting an asset does not necessarily mean you have to pay tax. As a beneficiary you inherit the tax history of the asset, and if you sell it later down the track, you may be liable for capital gains tax on the profit made from the sale.  This is why it is extremely important to have good record keeping to ensure your estate beneficiaries can easily determine their future tax liability. The executor of an estate can elect to sell the asset and pay the proceeds as cash to the beneficiaries. In this case, the estate is the one who pays tax on the capital gain according to normal marginal tax rates referred to above. 

There are strategies available to reduce and at times mitigate the capital gains tax (CGT) issues associated with assets. More often than not it takes years of planning and we encourage you to engage with your accountant and a financial planner to discuss your options.

Importantly, there is a two-year exemption period for CGT if you inherit a principal home, meaning if you sell it within two years of the deceased’s death, you may avoid CGT.

As executor, it is important to consider the tax position of the estate before deciding to sell assets to distribute cash to beneficiaries. It may be appropriate to distribute assets to the beneficiaries who can better manage the tax liability in years to come.

Superannuation Death Benefits

If you receive a superannuation death benefit, the tax treatment depends on several factors, including whether you were a dependent of the deceased, the form of the benefit (lump sum or income stream), and whether the superannuation fund has already paid tax on the benefit. Strategies are available to improve the tax effectiveness of Superannuation benefits, and with careful estate planning, choosing the correct beneficiary can yield further tax benefits for the estate and beneficiaries.

Do you have any other questions about estate planning or taxes?

It’s a good idea to consult with a tax professional and financial adviser to understand your specific tax obligations and ensure compliance with Australian tax laws.

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