First: What You Don't Have to Worry About
Australia abolished inheritance tax (death duties) federally in 1979. Most Australians who receive an inheritance pay no tax on the receipt of that inheritance. Understanding what is and isn't taxable clears the path for smart planning.
- No Australian inheritance tax: You do not pay tax simply for receiving an inheritance in Australia. The estate pays any tax due before distribution - including the deceased's final income tax return and any capital gains tax triggered by the estate's asset disposals.
- CGT on inherited assets: When you inherit assets (shares, investment property, collectibles), you inherit a cost base - not a tax liability at the point of inheritance. CGT only applies when you eventually sell. The ATO's special rules determine your cost base for inherited assets.
- Inherited property cost base: If the deceased acquired the property before 20 September 1985 (pre-CGT asset), your cost base is the market value at the date of death. If acquired on or after 20 September 1985 (post-CGT asset), your cost base is the deceased's original cost base - and the 50% CGT discount applies if the combined holding period (deceased + you) exceeds 12 months.
- Inherited shares: Same rules apply - pre-CGT (before 20 September 1985) inherited shares get a market value cost base at death. Post-CGT shares inherit the deceased's cost base. Get valuations or closing prices at the date of death for all inherited shares - this documentation is critical and often forgotten in the grief of estate administration.
- Super death benefits: Superannuation is not part of the estate and is not governed by the will. Super paid directly to a spouse or financial dependant is tax-free. Super paid to an adult non-dependent child is taxed at up to 17% on the taxable component. If the estate receives super (via the estate rather than direct payment), it's then distributed under the will and may be taxed differently.
- Foreign inheritance: Inheriting from overseas relatives may trigger tax obligations in the other country (many countries have inheritance or estate taxes). Australian tax is not levied on the inheritance itself, but any income subsequently generated from inherited foreign assets is assessable in Australia.
The Pause: Why You Shouldn't Act Immediately
The weeks following a loss are the worst time to make major financial decisions. Building in a deliberate pause before acting on an inheritance protects against expensive emotional decisions.
- The 6-month rule: Financial planning consensus suggests waiting at least 3-6 months before making any major financial decisions with inherited money. This allows time to process grief, gather financial information, obtain professional advice, and make considered rather than reactive decisions.
- Immediate practical steps: Park the cash in a high-interest savings account or term deposit. Do not invest, spend on major purchases, lend to family members, or pay off complex debt structures until you have a plan. A 5% return on $500,000 for 6 months while you plan is $12,500 - worth the wait.
- Probate and estate administration: Estates can take 6-18 months to finalise. Don't plan around money you haven't received yet. Property sales through an estate can take longer if there are complications (disputes, overseas beneficiaries, complex assets).
- Family dynamics: Inheritances frequently cause family conflict - even in previously harmonious families. Don't make financial decisions or promises to family members under social pressure. Decisions about lending inherited money to relatives, jointly purchasing property, or gifting shares should be made with clear heads and professional advice.
- Tax obligations of the deceased's estate: As a beneficiary or executor, ensure the estate's tax affairs are in order before distribution - final tax return lodged, any CGT events in the estate properly reported, and any outstanding tax debts paid. Distributing an estate with unresolved tax liabilities creates personal risk for executors.
- Seek advice before selling: Inherited investment properties and share portfolios have cost bases that determine future CGT - and the timing of sale affects which tax year the gain falls in. Don't sell inherited assets immediately without understanding the tax consequences. A conversation with a tax agent or financial adviser before any sale is money well spent.
Integrating the Inheritance Into Your Financial Plan
Once you've paused, gathered information, and sought advice, the inheritance should be integrated into your overall financial plan - not treated as separate windfall money with different rules.
- Assess your current financial position: What does your net worth look like before and after the inheritance? What are your highest-priority financial goals - mortgage elimination, retirement, children's education, emergency fund? The inheritance should address your biggest financial gaps first.
- Eliminate high-interest debt: Credit cards, personal loans, and car loans at 7%+ should be cleared with inherited funds before investing. A guaranteed 18% return (credit card interest avoided) beats any investment.
- Home loan paydown vs investing: Paying down a 6.2% non-deductible mortgage is equivalent to a guaranteed 6.2% post-tax return - better than cash and comparable to conservative investments. Investing the inheritance in growth assets may outperform long-term but carries risk and volatility. Many Australians choose a split: pay down the mortgage to a comfortable level and invest the remainder.
- Superannuation contributions: An inheritance creates a rare opportunity to make large super contributions. Non-concessional contributions (up to $120,000/year or $360,000 via bring-forward) move the money into a 15% earnings tax environment - potentially for decades. Check your total super balance against NCC eligibility thresholds before proceeding.
- Investment portfolio building: A lump sum invested in a globally diversified ETF portfolio is an excellent use of inherited funds - but consider timing. Lump-sum investing (all at once) is statistically better than dollar-cost averaging over time, but dollar-cost averaging over 6-12 months reduces the risk of investing at a market peak and may suit investors who are uncomfortable with the all-at-once decision.
- Investment property purchase: Inherited funds can provide the deposit for an investment property - avoiding LMI and providing genuine equity from day one. Ensure the property investment decision is driven by investment fundamentals (location, yield, growth potential) rather than the desire to 'do something substantial' with the inheritance.
Estate Planning Lessons From the Inheritance
Receiving an inheritance - even a well-managed one - typically reveals gaps in your own estate planning. Use the experience as a prompt to review your own arrangements.
- Review your own will: Did the estate administration process reveal that the deceased's will was unclear, out of date, or missing testamentary trust provisions? Apply these lessons to your own will. If you don't have a will - make one now. The estate administration process you just observed is what your family faces without one.
- Update your BDBN: Super does not follow your will. If the inheritance included superannuation paid to a non-preferred beneficiary because of an expired or misdirected BDBN - ensure your own BDBN is current, non-lapsing where possible, and correctly structured.
- Your own Enduring Power of Attorney: If managing the estate revealed how difficult things become without an EPoA - someone having to go to a tribunal to manage an incapacitated person's affairs - ensure you have a valid EPoA in place before anything happens to you.
- Advance care directive: If end-of-life medical decisions were difficult or disputed during the deceased's final period, an advance care directive expressing your own wishes clearly reduces this burden on your family.
- Testamentary trusts: If the estate distributed large sums to adult children or grandchildren with no income tax planning, consider whether testamentary trusts in your own will could reduce the tax on investment income for your beneficiaries.
- Insurance review: The death of a parent or sibling is a powerful reminder of mortality. Use the moment to review whether your own life, TPD, and income protection cover is adequate for your dependants.
An Inheritance Is an Opportunity - If Approached with Intention
Research consistently shows that inherited wealth is dissipated within one generation in the majority of cases - not through bad investment decisions but through lack of planning, emotional spending, and family pressure. The Australians who preserve and grow an inheritance are those who pause, seek advice, integrate it into an existing financial plan, and treat the money with the same discipline they'd apply to hard-earned income.
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