Understanding inheritance tax in Australia

In Australia, you may also have a superannuation death benefit, similar to life insurance. With this, you’ll nominate a beneficiary that will receive a specific lump sum from your super upon death. This benefit is one of the few inheritance payments that may be subject to a tax. When estate planning, you should discuss this with your accountant or a financial advisor.

The Australian Tax Office (ATO) states that the tax on superannuation inheritance is determined by who receives the benefits. Certain factors like whether the beneficiaries are dependents, their ages and how they receive the benefits (lump sum or an income stream) determine the tax payable.

The benefits paid out by your superannuation upon your death include taxable and non-taxable components. The tax-free components include government co-contributions and after-tax contributions. The taxable parts include salary sacrifice and employer contributions.

Some rules that come with superannuation death benefits impact how they’re taxed include:

• Non-dependent beneficiaries can only receive lump sum benefits, while dependents can receive the benefits either as a lump sum or an income stream
• Lump sum benefits received by dependents are entirely tax-free; however, the benefits received as an income stream are taxable (exceptions can be made in certain situations)
• The taxable portion of the benefits received by non-dependents are taxed irrespective of their age or the deceased’s age 

You have some control over how your super benefits are distributed after you die. Specifically, the ATO suggests that you can: 

• Make arrangements to have the balance placed into a superannuation proceeds trust
• Make a binding death nomination to ensure the super benefits are paid to the person you choose and taxed accordingly 

It’s important to remember that the definition of dependents varies between super laws and income tax laws. Even though you could make a binding death nomination to leave your super to someone who is not a dependant according to super laws, not all super funds will allow this. 

If you find your super fund doesn’t have the option for making a binding death nomination, you could either think about switching your super fund or connect with a legal professional to draft your will accordingly.

To plan out how the rest of your assets will be distributed, you’ll need to have a valid will that has been signed and witnessed. The tax implications on these assets will depend on the type of inheritance.

Inherited assets

If your beneficiaries choose to sell an inherited asset and make a gain, the sale proceeds will be subject to capital gains tax. If the executor of your estate sells the assets before distributing the proceeds, the sale will still attract capital gains tax unless there is an exemption that is applied.

Income from inherited assets

Any income earned as a beneficiary is assessed as regular income and will therefore be included in the calculation of yearly taxes. This may cause your beneficiaries to see an increase in their tax bill. However, the income is assessed in the year the entitlement was received, not the year the actual income was received. 

Given the complexity of taxation and estate planning, it would be wise to seek expert guidance to prepare your will. This will ensure your estate and proceeds are distributed in the way you want. If you end up being a beneficiary of an estate, it is also recommended that you get professional advice to understand the tax implications. And if you become an executor of an estate, getting independent legal counsel and financial advice can be helpful in understanding the best way to distribute the assets and the possible implications.