Unlike other countries, there is no gift duty or inheritance tax in Australia. This may sound like excellent news, but keep in mind that you will still have some extra tax obligations as a beneficiary. You’ll have a few extra details you need to include on your tax return as well, so read on to ensure you remain on the right side of the Australian Tax Office (ATO).
Let’s start with superannuation death benefits.
How to Claim Superannuation Death Benefits
If you think you’re in line to receive a superannuation death benefit from someone who’s passed away, or if you’re the legal point person for someone’s estate, you’ll need to reach out to the superannuation fund of the deceased person. Let them know about the unfortunate event and ask them to release the superannuation funds. The super fund will take it from there. However, you will then have some tax obligations to satisfy with the ATO.
You may need to pay tax on the superannuation death benefit. This will hinge on factors such as:
- Whether you were a dependant of the deceased
- Whether you’ll receive a lump sum or income stream
- Whether the super fund has already paid tax, and what component was tax-free or taxable
- The age of the fund holder at the time of death
A nominated beneficiary may be appointed, depending on your super fund. This may be binding or non-binding. In a binding death benefit nomination, the deceased is able to nominate one or more dependants to receive the super. In the case of no nomination, the trustee may decide on the deceased person’s behalf or make a payment to the executor for distribution.
Tax on Superannuation
Super fund death benefits can come with a tax-free and taxable component. As a beneficiary, you will not need to pay tax on the tax-free component, regardless of whether you withdraw it as a lump sum or receive it as an account-based income stream.
For the taxable component, there are rules based on age and whether the beneficiary was a spouse or dependant. If the beneficiary is a dependant of the deceased, they will incur no tax on the taxable component of the death lump sum benefit and will not need to report it on a tax return as income. If a dependant receives a capped and defined death benefit income stream, tax rates will apply.
The effective tax rate you will pay
Taxable component – taxed element
- Your marginal tax rate or 17% – whichever is lower (including the Medicare levy)
Taxable component – untaxed element
- Your marginal tax rate or 32% – whichever is lower (including the Medicare levy)
Do You Pay Capital Gains Tax on Inherited Property?
As a beneficiary, you may incur capital gains tax on the proceeds earned from selling assets you inherited. The ATO regards that as a part of a normal income stream, so you’ll need to report the sale and any income earned through inherited assets as a part of your tax return.
Confused about what does and doesn’t have to go on your tax return? Contact your local ITP branch today and one of our friendly accountants will straighten everything out for you. This is the easiest and most affordable way to ensure you stay on the right side of the law while minimising your tax obligations and maximising your tax refund.
Do You Declare Inheritance on a Tax Return?
When you are a beneficiary, you need to declare your share of any trust income, including the amount of entitlements, assessable income, interest, and any franking credits or dividends. You’ll also need to declare any income stream through superannuation on your tax return.
There are different rules and obligations for non-residents and for beneficiaries who have a legal disability. Australian law does recognise wills prepared in other countries. However, this can get complicated as there may be different laws and taxes from the other country that must also be followed.
Advice on Inheritance Taxes in Australia
Though there technically isn’t an inheritance tax in Australia, the subject is not a simple one. As we’ve covered above, there are some circumstances in which you’ll need to pay taxes related to inherited assets. For this reason, it’s a good idea to seek expert advice on everything from drafting your will to specifying how your estate and its assets will be distributed. If you are a beneficiary, professional advice will help you understand and organise your tax affairs and minimise any tax you may need to pay. An income tax professional will know what to do and will help you navigate this situation with ease and grace.
As Australia’s Income Tax Professionals, ITP helps over 300,000 with their tax each year. Our talented tax agents have studied tax law in depth and can help you with difficult circumstances such as deceased estates. Our tax accountants are also highly experienced in setting up and managing trustee estates and can act as your legal executor if required. Speak with one of our caring Tax Professionals today, and they’ll help you satisfy all your legal obligations without the stress or fuss.