Most developed countries impose some form of inheritance or estate tax on the value of a deceased estate. While the colloquial term “estate tax” is used interchangeably with “inheritance tax” in some countries, there are differences between these and inheritance taxes. Specifically, a beneficiary of an estate pays “inheritance tax”, whereas “estate tax” is levied against the estate during probate and before bequests are distributed. Australia does not currently impose either tax, but a beneficiary in a deceased estates matter should still be aware of the financial complications that arise from inheriting. This article outlines the history of inheritance tax and the taxes that do apply to inherited assets in Australia.
International Inheritance Tax
Inheritance tax varies significantly depending to the succession law of the country involved. Japan has the highest inheritance tax rate at 55%, followed by South Korea at 50%, France at 45%, with the US and UK at 40%. To ensure that there is some parity in the tax assessment, most countries have a sliding scale of inheritance tax depending on the value of the deceased estate. For instance, an American deceased estate is only taxed at 40% if the total value of the assets is more than $11 million. In the UK, the 40% inheritance tax applies to any estate worth over £325,000.
Inheritance Tax In Australia
Until 1979, Australia had inheritance taxes at both state and federal levels. These tax rates were progressive and calculated on the total value of the estate. While a high “exemption threshold” limited the impact of taxes on smaller estates, the taxes were particularly unpopular with farmers and small business owners who felt that the tax hindered business succession. In the 1970s, Queensland abolished inheritance taxes in an attempt to attract new residents. Soon after, the federal government followed, eliminating national inheritance tax. All assets of a deceased estate, including property, shares and cash, then became exempt from direct tax.
Tax Implications Of Inheritance
Any person who is a beneficiary under a will has a responsibility to ensure that they pay the required tax on the assets inherited. If a beneficiary’s financial position changes after inheriting then they may be subject to standard taxes on earned interest and capital gains. For instance, if a beneficiary is bequeathed a share portfolio they must pay all applicable taxes on their earnings. Similarly, there are tax implications for additional income and capital gains made from the sale of any assets.
A beneficiary will be subject to income tax on any earned income they receive from an inherited asset, and when they sell an inherited asset, they may have to pay capital gains tax. For instance, if a person inherits a house, and rents it out for a period, that revenue stream must be included as income when they complete their tax return. If the beneficiary sells the asset, they will have to pay capital gains tax on the proceeds.
When a person who has invested in a superannuation fund dies and they have made out a Binding Death Benefit Nomination, the fund’s proceeds go directly to the nominee. A beneficiary who inherits a testator’s superannuation may have to pay tax on those funds.
A surviving spouse does not have to pay tax on their deceased partner’s superannuation, but this exemption does not apply to non-dependents. Some of a super death benefit is likely to be taxed depending on:
- whether the beneficiary is classed as a dependent under taxation law;
- whether the benefit is paid in an income stream or as a lump sum;
- whether the super is taxable and whether the super fund has paid tax on the taxable component; and
- How old the beneficiary and the deceased were at the time of death for the purposes of income streams.
The fact that Australia does not have inheritance taxes has concentrated wealth in a relatively small number of families. There have been calls for some form of inheritance tax to be reintroduced, but this is unlikely to be politically popular.
The rules and obligations governing bequests are different if the recipient is not an Australian resident or is legally recognised as disabled. Other taxes may apply if the testator lived overseas with property in another country.
It is important that a testator and their beneficiaries understand property inheritance law as well as the tax implications on any bequests contained in a will. Careful estate planning can minimise the chance of a beneficiary having to pay tax on their inheritance.
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