But while it’s true that Australia doesn’t officially have an ‘inheritance tax’, the idea that money will flow tax free from one generation to the next is a myth. The reality is more complicated.
This is one of the simplest areas of an inheritance, at least most of the time.
If you inherit cash from a bank account, there is no tax that’s applied.
That being said, once the cash savings are transferred to your name, you may pay tax on the interest income generated by the money.
For example: If you park it in a high interest savings account — where it’s treated like your other investment income.
With the family home, if the property was a primary residence, and you sell the property within a two year period, there’s usually no capital gains tax (CGT).
But if you hold it for longer than this amount of time and rent out the property with an investment, you will be up for capital gains tax when you eventually sell.
Inheriting shares and property investments
Inheriting shares, managed funds, investment properties, and other investments like even cryptocurrency can give your assets a serious boost, but it’s also where tax issues often have the biggest impact.
When you inherit assets that were investments, you will typically ‘inherit’ the cost base — that means that when you eventually sell the asset, you will pay CGT on the difference between the original purchase price and the value you sell the asset for (not the value when you inherited it). In other words, you’re inheriting the tax history.
For example:
Your parents bought shares for $50,000
They’re worth $150,000 when you inherit them
You sell them later for $200,0000
In this case, you’d be taxed on a capital gain of $150,000, not just the $50,000 they’ve grown since the time you inherited the shares.
This can be a nasty surprise for people that think inheriting investments means you start with a clean slate.
It’s worth noting here that if you inherit assets that were bought prior to capital gains tax being introduced (September 1985), the cost base of these investments will typically ‘reset’ to the value at the date you inherited them.
These aren’t very common these days, but this is an uncommon quirk of the rules so it’s one to look out for.
Superannuation isn’t received tax free
Super is another asset people think you can receive tax free, but that can actually come with a death tax of up to 30 per cent on the total balance of inherited super money.
When super money is passed down from one person to a ‘dependent beneficiary’, i.e. spouse or dependent child, it’s received tax free.
This gets a little complicated, but the amount of tax you pay comes down to what’s called the ‘components’ of your super fund, which have names like ‘taxable - taxed’, ‘taxable - untaxed’, and ‘tax free’.
These different components get made up by the different types of contributions you put into your super fund.
The most common form of contributions, your employer compulsory contributions and any salary sacrifice or tax deductible contributions go into the ‘taxable - taxed’ element - and this component is taxed at 15 per cent when received by non dependent beneficiaries.
On a $1 million super balance, this means total tax of $150,000 which can take a big chunk out of your inheritance.
The good news is that this tax can be eliminated over time with a ‘withdrawal and re-contribution’ strategy, which can benefit the super account holder while they’re in retirement, and save a heap of tax for their beneficiaries.
Worth noting this is a fairly complex area and strategy, and if you’re considering going down this path you should seek out some quality professional advice to make sure you get it right.
Tips to keep more of an inheritance
If you think you’re going to get an inheritance, and you don’t want to see a big chunk of it evaporate to the ATO, there are a few things you should do.
First, understand what you’re inheriting.
Cash, shares, property, and super all have different rules, you want to understand them and plan within the rules.
Next, it’s important you’re smart with your timing.
Selling assets within timeframes can mean big tax savings.
You also should plan around super tax, particularly if adult children or non dependents are the likely beneficiaries.
And given the sums involved, consider starting the conversation early and getting some good advice — it’s likely anyone that’s leaving an inheritance wants the money to go to their beneficiaries rather than the ATO - meaning some smart planning now can save big dollars down the line.
The wrap
Australia may not have an inheritance tax, but that doesn’t mean inheritances are simple, or tax free.
What you inherit, and how you deal with them, determines how much you keep and how much you lose.
With trillions of dollars set to change hands in the decades ahead, families that plan ahead will hold onto more — for everyone else, believing the inheritance myth could be an expensive mistake.
Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth. Ben’s new book, Virgin Millionaire; the step-by-step guide to your first million and beyond is out now on Amazon | Audiobook.
If you want some help with your money and investing, you can book a call with Pivot Wealth here.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.
