Tax on inheritances: what's taxed, and what isn't

What's not taxed

Cash, personal-use items (a car, furniture, jewellery) and other assets you inherit directly aren't assessable income, and simply receiving them doesn't trigger capital gains tax. The tax question only comes up later, if and when you sell or dispose of what you've inherited.

Selling an inherited asset later — capital gains tax

• If the person died owning an asset they bought after 20 September 1985 (when CGT began), you inherit their original cost base and acquisition date. When you eventually sell, your gain is measured from what they originally paid, not the value when they died.
• If they bought the asset before 20 September 1985 ('pre-CGT'), your cost base instead resets to its market value at the date of death.
• Either way, get a proper valuation of any investment asset (shares, an investment property) as close to the date of death as practical. It's far easier to establish than trying to reconstruct it years later when you come to sell.
• The deceased's main residence can generally be sold free of CGT if the sale settles within two years of death, as long as it was their home (not rented out) just before they died. The ATO can extend this in some circumstances, such as a complex estate or a life interest under the will, but it isn't automatic.
• A surviving spouse who moves in and keeps living there as their own main residence can keep the exemption going beyond the two years, for as long as it stays their home.

ATO: Inherited property and CGT ↗

Superannuation death benefits are taxed differently

• Super isn't automatically part of the estate — it's usually paid separately, either directly to a beneficiary the fund decides on (or that the deceased nominated), or to the estate to be distributed under the will.
• Paid to a 'tax dependant' — a spouse, a child under 18, or someone who was financially dependent on the deceased or in an interdependency relationship with them — the lump sum is tax-free.
• Paid to someone who isn't a tax dependant (commonly a financially independent adult child), the taxable component is taxed: generally 15% (plus the Medicare levy if paid directly to them, not via the estate) on the taxed element, and more on any untaxed element. The tax-free component still passes to them tax-free.
• Whether it's paid directly by the fund or passed through the estate, someone has to work out and withhold the right amount before it reaches a non-dependant — see our article on administering an estate for the executor's side of this.
• This is a simplified summary — death benefit income streams (pensions) and more complex situations have their own rules, so talk to us about your specific situation.

Inheriting from overseas

Receiving money or assets from an overseas estate isn't taxed in Australia on receipt either. But the country the estate is administered in may have its own estate or inheritance tax — worth checking with an adviser there — and once you hold the inherited asset, ordinary Australian rules apply from then on: capital gains tax if you later sell it, and tax on any income it earns (rent, interest, dividends) while you hold it.

Thinking about your own estate

There's no death duty here, but that doesn't mean a well-meaning plan can't leave the people who inherit from you with an unexpected capital gains tax bill — particularly for an investment property or shares bought a long time ago. It's worth a conversation with us and your solicitor while you're planning, not left for whoever administers your estate to work out.