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Death and Taxes: Navigating Estate Taxes in Australia

Published 16/10/2024 | Last Updated 16/10/2024

Written by:
Joel Simmonds
Head of Advice  

They say there are only two certainties in life: death and taxes. While we can’t escape either, understanding estate taxes in Australia can help you navigate the financial landscape that follows when someone passes away.

Although Australia abolished its federal death tax decades ago, estate taxes and capital gains taxes can still apply in some circumstances, especially on deceased estates.

Let’s break down what you need to know about estate taxes in Australia, from inheritance tax to capital gains tax on inherited property.

Table of Contents

The Abolition of Death Taxes in Australia

Australia abolished its death tax at the federal level in 1979.

Prior to this, the government levied death duties on estates based on their size, which significantly reduced what beneficiaries could inherit.

Death duties were considered a major financial burden on families already dealing with the emotional weight of loss. The removal came after strong public opposition and political campaigns arguing that the tax unfairly penalised ordinary families.

Today, while there’s no federal death tax, other taxes, particularly capital gains tax (CGT), can still apply depending on the types of assets being transferred in a deceased estate.

What Is Estate Tax in Australia?

Australia doesn’t have a traditional estate tax (sometimes referred to as death tax), which is a tax on the total value of someone’s estate when they die.

In fact, the federal death tax was abolished back in 1979. This means that when someone passes away, their beneficiaries typically don’t have to pay a death tax on their inheritance.

However, that doesn’t mean beneficiaries are entirely off the hook. Capital gains tax (CGT) and other taxes can still apply in certain situations.

The term “estate tax” might still pop up because people use it to refer to the taxes that could apply when transferring property or investments from a deceased estate to beneficiaries.

Capital Gains Tax and Deceased Estates

One of the biggest concerns with estate taxes in Australia is capital gains tax on deceased estates.

CGT applies to the sale of assets that have appreciated in value since they were acquired. When someone inherits a property or shares, CGT could apply if they decide to sell those assets later.

Here’s the kicker: if you inherit property that has increased in value since the original owner bought it, you could be liable for capital gains tax on the difference between the original purchase price and the sale price, unless it was the deceased’s primary residence, in which case special exemptions may apply.

This can be a significant issue if you’re dealing with substantial assets, such as an investment property or shares from a deceased estate.

Tax Implications of a Deceased Estate

While there’s no formal estate tax in Australia, several taxes could still come into play:

  1. Capital Gains Tax (CGT): As mentioned, you may need to pay CGT when selling inherited assets.
  2. Deceased Estate Income Tax Return: If the deceased’s estate is earning income (from investments or rental property, for example), the executor might have to file a deceased estate income tax return to report that income.
  3. Taxable Estate: Some elements of the deceased’s estate, like income or dividends, may still be taxable, especially during the period when the estate is being administered.

Superannuation and Inheritance

Superannuation is a special case when it comes to deceased estates. Unlike other assets, superannuation doesn’t automatically form part of the deceased’s estate unless it’s specifically directed to do so in a will.

Instead, superannuation funds are typically paid out directly to beneficiaries, and the tax treatment can vary depending on who the beneficiary is and the nature of the superannuation payout.

For instance, if the beneficiary is a dependent, such as a spouse or child under 18, the payout may be tax-free.

However, if it’s paid to a non-dependent adult, it could be subject to taxes on the taxable components of the superannuation. Additionally, the treatment of superannuation inheritance differs depending on whether it is paid as a lump sum or pension.

Deceased Estate Property and Its Treatment

A deceased estate typically includes various types of property, from real estate and shares to personal belongings and superannuation. The tax treatment of these assets varies, with capital gains tax being one of the most common taxes faced by beneficiaries. Real estate, for example, may be exempt from CGT if it was the deceased’s primary residence, but investment properties could attract CGT upon sale.

While real estate is one of the most significant assets in a deceased estate, shares and investment portfolios may also be transferred. In these cases, beneficiaries may face capital gains tax when selling inherited shares or other assets. If the shares were purchased at a much lower price, the CGT bill could be substantial, depending on the increase in their market value.

Hypothetical Example: Inheriting and Selling Property

Let’s say you inherit an investment property worth $800,000, which your relative originally purchased for $500,000.

If you decide to sell the property, you’ll be liable for capital gains tax on the $300,000 increase in value, minus any deductions or exemptions.

If you sell it within two years and it was the deceased’s primary residence, you may avoid paying CGT altogether, depending on the specifics of the estate. However, if it’s an investment property or you hold onto it for longer than two years, you could face a significant CGT bill.

Plan Ahead and Protect Your Loved Ones

While navigating the complexities of estate taxes and capital gains tax can be daunting, having the right plan in place can save your beneficiaries from unnecessary financial stress.

At Direct Wealth, we specialise in estate planning services designed to protect your assets and ensure a smooth transition for your loved ones. Our expert team can help you understand the tax implications, minimise liabilities, and create a comprehensive plan tailored to your needs.

Don’t wait until it’s too late — reach out to us today to secure your legacy and give your family peace of mind.

Financial Adviser Erin Truscott Explains Our Estate Planning Services

Erin Truscott shares how our estate planning services can help you protect your legacy and secure your family’s future.

Learn how we tailor estate plans to reflect your personal wishes, ensuring that your assets are distributed according to your intentions and providing peace of mind for you and your loved ones.

FAQs: Estate Taxes in Australia

  1. What is the “death tax” in Australia?
    While the federal death tax was abolished in Australia in 1979, capital gains tax may still apply on certain inherited assets.
  2. What is a deceased estate?
    A deceased estate refers to the property, assets, and liabilities left behind when someone dies. This estate is managed by an executor or administrator until the assets are distributed to beneficiaries.
  3. Do I have to pay tax on inheritance in Australia?
    In general, there is no inheritance tax in Australia. However, if you sell an inherited asset, you may be subject to capital gains tax.
  4. How is capital gains tax calculated on deceased estates?
    Capital gains tax is usually calculated based on the difference between the value of the asset when it was originally purchased and its value when it’s sold. Exemptions may apply if the property was the deceased’s primary residence.
  5. Do I need to file a tax return for a deceased estate?
    Yes, if the estate is generating income (from investments, rent, etc.), the executor may need to file a deceased estate income tax return.
  6. Are there tax rates for deceased estates?
    Deceased estates are taxed under special tax rates in Australia, particularly if they generate income during the administration period. These rates differ from standard personal income tax rates.
  7. Who pays capital gains tax on a deceased estate?
    The capital gains tax is typically paid by the beneficiary when they sell an inherited asset that has appreciated in value.

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December 5, 2024

This is a publication of Direct Wealth Pty Ltd, a wholly owned subsidiary of Direct Wealth Group Pty Ltd.

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