Inheritance in Australia: Key Tax Rules and What to Expect

Inheritance tax is a topic that often brings up questions, confusion, and, sometimes, stress. For those who are new to it, inheritance tax refers to taxes that may apply when someone inherits assets, whether money, property, businesses, or other valuable items, from a loved one who has passed away. While many countries have some form of inheritance or estate tax, Australia’s approach is unique in that it does not impose a direct inheritance tax. However, this doesn’t mean that inheriting an asset in Australia is always tax-free.

In this guide, we’ll walk through the basic concept of inheritance tax, explain how it applies (or doesn’t apply) to Australian taxpayers, and cover what you need to know about liabilities and exemptions, especially if the inheritance includes income-generating assets like businesses or overseas properties. We’ll also break down some of the tax implications that could arise when selling an inherited asset.

What is Inheritance Tax, and Does it Apply in Australia?

In many countries, inheritance tax is a tax paid by an heir on the value of an estate left to them by a deceased person. However, Australia does not have an inheritance tax. This means that, generally speaking, Australians don’t pay taxes just for receiving an inheritance.

While there’s no inheritance tax, taxes can still be incurred on inherited assets in Australia through other forms of taxation, such as Capital Gains Tax (CGT) or Income Tax, depending on the asset’s nature. These forms of tax might apply if:

1. The inherited asset is sold.
2. The inherited asset generates ongoing income (like rental property or shares).
3. The inherited asset is held abroad.

Let’s break down these scenarios and explain some terms as we go.

Capital Gains Tax (CGT) and Inherited Assets

Capital Gains Tax (CGT) is a tax on the profit from the sale of certain assets, including property, shares, and businesses. In Australia, CGT is generally applied only when an asset is sold, rather than when it is inherited. However, there are nuances when it comes to inherited assets, especially if you plan to sell them or they have income potential.

How Does CGT Work with Inherited Assets?

• Primary Residence Exemption: One major CGT exemption in Australia is for a primary residence—essentially the main home that a person lives in. If you inherit a primary residence and decide to keep or sell it within two years of the deceased’s passing, you generally won’t have to pay CGT. This is provided that the home was the deceased’s main residence and wasn’t used to generate rental income.
• Investment Properties: Inheriting an investment property comes with different rules. Investment properties, such as rental homes, are subject to CGT when sold. The tax liability is calculated based on the increase in value from the time the deceased person acquired the property until the time it is sold by the inheritor. This could mean a larger CGT liability if the property’s value has grown significantly since its initial purchase.
• Collectibles and Personal Use Assets: Items like artwork or jewellery are also subject to CGT, but only if they’re valued above a certain threshold. However, if you inherit items purely for personal use and they don’t exceed the CGT threshold, no tax will typically apply upon sale.

What if the Inherited Asset is a Business?

Inheriting a business can come with its own set of rules and tax obligations. Small businesses in Australia benefit from a range of CGT exemptions and concessions, but these depend on meeting specific criteria.

For example:

1. 15-Year Exemption: If the deceased had owned the business for at least 15 years and met other qualifying conditions, the asset may be exempt from CGT upon inheritance.
2. Small Business Rollover Relief: This concession allows inheritors to defer CGT if they reinvest the proceeds of the business sale into another active business.
3. Other Small Business Concessions: Other concessions include a 50% active asset reduction and a retirement exemption. Each of these has its own requirements, so consulting our tax experts would be wise.

Income Tax and Inherited Assets That Generate Income

When inheriting assets that generate income, such as rental properties, shares, or a business, the income derived from these assets will generally be subject to income tax. Here’s how income tax would apply:

• Rental Properties: If you inherit a rental property, any rent you collect will need to be included in your taxable income. You’ll also be able to claim deductions on property-related expenses, such as maintenance and management fees, which can reduce the overall income tax liability.
• Shares and Dividends: If you inherit shares that pay dividends, the dividends will be treated as income and must be declared in your annual tax return. Dividend income is taxed at your marginal tax rate. In some cases, you may also receive franking credits, which can reduce the tax payable on these dividends.
• Inherited Business Income: If you continue to operate an inherited business, the income it generates is subject to income tax. Operating a business also means you will have to handle tax-related business expenses and deductions, such as payroll tax, superannuation (pension) obligations, and business expense deductions. It’s essential to keep clear records and consider consulting our team to stay compliant.

Overseas Assets: Does Inheritance Tax Apply to Foreign Properties?

Australian tax residents are taxed on their worldwide income, which means that if you inherit assets held abroad, you may have tax obligations both in the country where the asset is located and in Australia.

1. Foreign Properties and CGT: Inheriting property in another country may trigger CGT when you sell the asset, similar to the rules for domestic assets. You’ll need to report the sale and pay CGT based on the capital gain made from the time the deceased acquired the asset until it was sold.
2. Income from Overseas Assets: If the inherited foreign asset generates income, such as rental income from an overseas property, this income needs to be reported to the Australian Tax Office (ATO). Australia has agreements with some countries to avoid double taxation on income, known as Double Tax Agreements (DTAs), which can prevent you from paying taxes twice on the same income.
3. Foreign Inheritance Tax: Some countries do impose inheritance tax. If you inherit property or other assets in a country that has an inheritance tax, you may need to pay this tax before receiving the asset. The good news is that this inheritance tax is generally not repeated in Australia, but you will still have to handle any CGT or income tax requirements if you sell or earn income from the asset.

Exemptions and Reliefs for Australian Inheritors

To minimise tax liability on inherited assets, Australia offers several exemptions and relief options. Here is a recap of the key exemptions that might apply:

• Two-Year CGT Exemption on Primary Residence: If you sell an inherited primary residence within two years, CGT is often exempt.
• Small Business Concessions: Inheriting a small business may allow you to access several CGT exemptions if certain criteria are met.
• Personal Use Assets: Personal assets valued below a certain threshold can sometimes be sold without incurring CGT.
• Foreign Tax Credits: If you have already paid foreign taxes on an inherited asset, you may be eligible for a tax offset or credit to prevent double taxation.

Key Points to Remember About Inheritance and Taxation in Australia

1. No Direct Inheritance Tax: Australia doesn’t impose a direct inheritance tax, but other taxes like CGT and Income Tax might apply based on how the asset is used or sold.
2. Understand the Nature of the Asset: The type of asset inherited—whether it’s property, shares, or a business—will determine the tax obligations. Primary residences often qualify for more exemptions than investment properties.
3. Consider Overseas Implications: If the asset is located outside Australia, be prepared for potential foreign inheritance tax and understand Australia’s requirements for reporting income from foreign sources.
4. Small Business Concessions: If inheriting a business, investigate small business CGT concessions, as these can significantly reduce or even eliminate tax liabilities on the sale.
5. Seek Professional Advice: Inheritance tax and related obligations can get complex, particularly with high-value or income-generating assets. Consulting with a tax professional can help you avoid unexpected liabilities and ensure compliance with Australian tax laws.

While Australia’s lack of a direct inheritance tax simplifies things for Australian inheritors, it is still essential to understand the tax implications of any asset you inherit. Taxes like Capital Gains Tax and Income Tax on inherited income-generating assets can significantly affect your inheritance’s value if not managed properly. Whether it’s a family home, a rental property, or even an overseas business, knowing the tax obligations associated with your inheritance can help you make the most of it while staying within legal requirements.

Our firm is here to support you at every stage. With personalised guidance and careful tax planning, you can confidently make decisions that maximise the value of your inheritance while adhering to all legal requirements. Remember, every inheritance is unique, and consulting with our firm can ensure your approach is tailored, compliant, and optimally managed. Take the time to understand your inherited assets, make use of available exemptions, and reach out to our advisors when in doubt. Doing so can help ensure that the legacy left to you by a loved one is both protected and responsibly managed.