How to Manage an Inheritance in Australia: Tax, Investing and Getting It Right

Australia does not have a formal inheritance tax or estate duty at the federal level - estates are not taxed on death. However, this does not mean inheriting assets is tax-free. Capital gains tax, superannuation death benefit taxes, and stamp duty can all apply depending on the asset type and who receives it.

• No death duty: Australia abolished federal estate duty in 1979. State death duties were progressively abolished through the 1970s-1980s. Today, no Australian state or territory levies an inheritance or estate tax
• But CGT applies on disposal: While death itself is not a CGT event for most assets, when beneficiaries later sell inherited assets, CGT applies - based on the cost base inherited from the deceased
• Super death benefits ARE taxed: Superannuation passing to non-dependants (adult children in most cases) attracts a death benefit tax of 17% (15% tax + 2% Medicare Levy) on the taxable component. This is often the most significant tax event in an estate
• Stamp duty on property transfers: In most states, a transfer of property from a deceased estate to a beneficiary is exempt from stamp duty. However, stamp duty may apply if the property is distributed other than strictly according to the will
• Foreign inheritance: If you receive an inheritance from overseas, the asset may have been subject to foreign estate tax. Australian CGT applies when you later sell based on the cost base at the date you acquired the asset

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The capital gains tax treatment of inherited assets depends on whether the asset was acquired before or after 20 September 1985 (pre-CGT vs post-CGT) and the deceased's original cost base.

• Pre-CGT assets (acquired before 20 September 1985): If the deceased acquired the asset before 20 September 1985, the beneficiary's cost base is the market value at the date of death. If the beneficiary sells immediately at market value, there is no capital gain
• Post-CGT assets: The beneficiary inherits the deceased's original cost base - not the market value at death. If the deceased bought shares in 2005 for $10,000 and they are worth $80,000 at death, the beneficiary inherits a $10,000 cost base. Selling at $80,000 triggers a $70,000 capital gain
• 50% CGT discount - 12-month rule: For inherited post-CGT assets, the beneficiary is treated as having held the asset since the deceased originally acquired it. If the deceased held the asset for over 12 months, the 50% discount applies immediately - the beneficiary does not need to hold for another 12 months
• Date of death cost base for some assets: Certain inherited assets - collectibles, personal use assets, and assets from a deceased who was a non-resident - use the market value at death as the cost base. Seek advice for unusual asset classes
• Timing of sale: If inheriting post-CGT assets with a low cost base and large unrealised gain, timing the sale across financial years (splitting gains over two years) can reduce the tax impact. The 50% discount means only half the gain is assessable - but the remaining half is still added to your income
• Executor responsibilities: The executor of an estate may need to sell assets to distribute cash to beneficiaries. Capital gains realised in the estate are assessed in the estate's tax return - at the deceased's marginal rate in the year of death, or the estate's own rate

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Inheriting the deceased's main residence triggers a specific CGT concession - but the timing of the sale critically determines whether it applies.

• The concession: A beneficiary who inherits a property that was the deceased's main residence at death (or was a pre-CGT asset) is exempt from CGT if the property is sold within 2 years of the date of death
• What qualifies: The property must have been the deceased's main residence just before death and must not have been used to produce income immediately before death. Or it must be a pre-CGT asset (acquired before 20 September 1985)
• 2-year clock: If the property is sold more than 2 years after the date of death, the CGT exemption may not apply in full. The ATO has discretion to extend the 2-year period in genuine cases (estate administration delays, legal disputes, market conditions) - but this is not automatic
• Partial exemption: If the deceased used the property partly for income production (e.g., renting out a room via Airbnb), the exemption is proportionally reduced
• If the beneficiary moves in: A beneficiary who moves into the inherited property and uses it as their own main residence extends the main residence exemption - the property is then exempt based on the period of the beneficiary's own occupancy as a main residence
• Practical implication: Do not delay selling an inherited property past the 2-year window without understanding the CGT consequences. The cost of delay can be a very large unexpected tax bill - particularly for properties with substantial capital appreciation since original purchase
• Obtain a valuation at date of death: Even if you are within the 2-year window and expect full exemption, obtain a formal valuation of the property at the date of death. This establishes the cost base if the exemption is later challenged or if the sale falls outside the window

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Superannuation does not automatically form part of a deceased's estate - it passes separately according to beneficiary nominations or trustee discretion. The tax treatment of super death benefits is one of the most misunderstood areas of Australian tax.

• Tax-free to dependants: Super paid to a tax-law dependant - spouse, de facto partner, child under 18, financially dependent child of any age, or interdependant - is entirely tax-free regardless of the taxable/tax-free components
• Adult children are NOT tax-law dependants: An adult child (18+) who is financially independent is not a tax-law dependant for super purposes. Super paid to them attracts 17% tax on the taxable component (taxed element: 15% + 2% ML; untaxed element: 32% + 2% ML)
• Taxable component: Most accumulated super is taxable - employer contributions and salary sacrifice contributions entered the fund with concessional treatment. The component grows in the fund and is taxed at death when paid to non-dependants
• Tax-free component: After-tax (non-concessional) contributions and crystallised tax-free amounts make up the tax-free component - passed to anyone tax-free
• Death benefit nominations: A binding death benefit nomination (BDBN) directs the trustee to pay super to nominated beneficiaries or the estate. Without a BDBN, trustees have discretion - which may not align with your wishes
• Estate planning strategy: To minimise super death benefit tax on death, consider: (1) progressively withdrawing and re-contributing as non-concessional contributions after age 60 to convert taxable to tax-free component, (2) withdrawing super in retirement before death occurs (tax-free from age 60), (3) directing super to the estate and passing to non-dependants via a testamentary trust (saves 17% but adds complexity)
• Reversionary pension: A reversionary pension automatically continues to a nominated spouse on death - no super trustee discretion, no lump sum tax event. Best death benefit strategy for married couples

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Receiving a lump sum inheritance is a significant financial event. The decisions made in the months after receiving an inheritance often determine whether it builds lasting wealth or disappears within a few years.

• Step 1 - Do nothing immediately: Give yourself 3-6 months before making major investment decisions. Grief and major financial decisions are a poor combination. Park the funds in a high-interest savings account or term deposit while you plan
• Step 2 - Clear high-interest debt: Credit cards, personal loans, and car loans should be eliminated first. A guaranteed return equal to the interest rate with no risk
• Step 3 - Assess your mortgage: At current rates of 6%+, paying down the mortgage provides a guaranteed after-tax return - and for many Australians this is the most impactful single use of a windfall
• Step 4 - Maximise super: If under 75, consider non-concessional contributions to super (up to $120,000/year in 2025-26, or $360,000 using the bring-forward rule over 3 years). Tax-free investment returns in pension phase are exceptionally powerful for long-term wealth
• Step 5 - Invest in a diversified portfolio: Remaining funds can be invested in a diversified portfolio of low-cost index ETFs (VAS + VGS or DHHF). Dollar-cost average if the lump sum is large - invest in tranches over 6-12 months rather than all at once
• Avoid common mistakes: Giving large amounts to family, funding a business without business planning, buying speculative assets (crypto, individual stocks in unfamiliar sectors), or spending on lifestyle items. Inheritances are often the only true financial windfall in a person's life - treat them accordingly
• Seek advice: For inheritances above $100,000, a fee-for-service financial adviser provides value that more than offsets the fee - tax planning, super strategy, and investment allocation done correctly can add tens of thousands in long-term wealth

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