Inheritance tax in Australia

Talking about death and inheritance is never easy. It’s an emotionally charged topic, and for many, it’s something they’d rather avoid. But having open conversations and planning ahead can save you and your family a lot of stress and unnecessary bills in the future.

Here are some important things to consider when it comes to inheritance, taxes, and the distribution of assets in Australia.

Understanding the basics of inheritance tax

Most developed countries have some form of inheritance or estate tax. This tax is levied on the value of the deceased’s money, property, and other assets before any distribution is made to beneficiaries. In some countries, the tax rate can be steep, reaching over 50%.

For example:

• In Japan, inheritance tax can be as high as 55% (on net estate balances above certain thresholds).
• The UK has an inheritance tax rate of 40% for estates valued above £325,000 (approximately A$650,000).
• The United States imposes estate taxes on estates valued over US$14 million (around A$22 million), with rates that vary depending on the value of the estate.

Inheritance tax in Australia

Australia has not had an inheritance tax since 1979 - but there are still tax implications to consider when receiving an inheritance. Mainly, if you inherit assets that generate income – such as interest, dividends, or capital gains – you’ll be required to pay the relevant taxes on that income.

For example, if you inherit shares that generate dividends, or property that increases in value when sold, you may be liable for capital gains tax (CGT) or income tax. Even if the inheritance itself isn’t taxed, any financial gains from it could be.

The growing discussion around inheritance tax

In 2010, the Henry Tax Review raised concerns about the absence of inheritance tax in Australia, suggesting that the growing concentration of wealth in the hands of a few could lead to economic inequality. It predicted that inheritances in Australia would rise significantly—from $22 billion in 2010 to $85 billion by 2030.

The media has covered this extensively in the intervening years, with news outlets referring to the “largest wealth transfer in Australia’s history” as a generation of baby boomers passes on homes, super and other assets to their children.

Despite ongoing debate, the reintroduction of inheritance taxes in Australia remains unlikely. The policy has proven politically unpopular, with public resistance playing a major role in deterring any changes. Even economists, like the Grattan Institute’s Danielle Wood, acknowledge the potential benefits to the federal budget but caution that such a tax would be "heinously unpopular" with voters.

Superannuation and inheritance tax

Super inheritance is another area that's generated significant interest in recent years. While there's no tax when super is passed on to a surviving spouse, the rules become more complex when it comes to non-dependants—such as children over 18 who are not financially dependent on the deceased.

In this scenario, the inherited super would be subject to a 15% tax (on the “taxed component”) plus a 2% Medicare levy. This could be up to $150,000 per $1 million paid out in addition to the Medicare levy.

As always, the individual circumstances will vary, and these are general numbers. An accountant or financial planner can provide more detailed advice.

Where to start?

None of this is easy to navigate on your own. Whether you’re planning your own estate or dealing with the inheritance of a loved one, seeking professional advice is crucial. A small upfront investment in financial or legal advice can potentially save your family tens of thousands of dollars in the long run.

The process of estate planning doesn’t have to be intimidating. By working with an expert, you can make informed decisions, reduce the potential tax burden on your loved ones, and ensure that your assets are distributed according to your wishes.

The easiest way to get started is to ensure you’ve nominated beneficiaries for your super. A death benefit nomination is a simple way to make your super fund aware of how you’d like your super to be distributed when you pass away.

While it might not be the easiest thing to think about, preparing for inheritance, taxes, and asset distribution today, can help spare your family much stress and uncertainty in the future. By consulting with one of our experienced planners, you can create a tailored strategy that addresses your unique circumstances, offering peace of mind and financial security for those you care about most. Find out more by talking to one of our planners.