Everyone knows there are two things in life that are certain: death and taxes. Inheritance and death taxes are the two places where these eternal issues intersect. Luckily for most Australians, there hasn’t been a true death tax in Australia’s tax code for decades. However, there are some taxes and levies that relate to death and assets Australians should be aware of.
Some of the tax issues that come with death are related to superannuation death benefits. There are a few issues that determine whether or how people are taxed on the super death benefits they receive. For example, dependants can expect not to pay tax on these benefits. Non-dependants will pay tax on the taxable portions. Dependants are able to choose a lump sum distribution or an income stream style distribution. Non-dependants have only one option: a lump sum distribution.
An inherited estate has some different challenges. Income from an estate is taxed as normal income. It’s always a good idea to seek financial advice from experts about a complex estate. This is true whether you’re planning an estate or about to inherit from one. Income proceeding from an estate is taxed at the rate of the year that the inheritance happened. For example, if someone inherits in 2019 but receives income in 2020, that income is taxed at the 2019 rate.
Most Australians don’t have complicated estates to worry about. But many will have assets, such as homes, that are passed on from one generation to the next. When an asset like a home is inherited, there’s often no capital gains tax assessed. This can depend on whether the deceased was resident in Australia when they died, and whether the home was a dwelling or rental property. Tax is only assessed on homes in the event that the asset is sold after being inherited.
Homes are also special cases under Australian tax law. For example, when other dwellings or land are sold, those assets are taxed normally. The Australian Tax Office has many great resources available online that can help people plan their estates. For inheritors, the site can also be a great resource to help them begin to navigate the tax code as it relates to death.