Does Inheriting Money Implicate Your Tax?

Anthony Bell

Finance Expert

It is often assumed that here in Australia, we do not have Inheritance Tax, Death Duties, or other such similarly titled taxes that are levied in many other countries around the world. And on the face of it, that is technically quite correct for individual taxpayers. However, if you are in receipt of an inheritance, be it cash or assets, there are some important facts that you should be aware of that could put you in a more knowledgeable position in respect of the tax implications to you, when you come to dispose of those inherited assets.

Let us start from the top. Upon someone else’s death, be it family or not, you have received a specific bequest, a share of a whole Estate, or perhaps the remainder of an Estate, once everyone else had received their bequests in accordance with the Will. Assuming that Estate was a 100% Australian Estate, and was administered by the Executors in the proper manner, you will have been passed those assets without any charge to tax to the Estate of the deceased. Death, in itself, is not a Capital Gains taxing (CGT) event. Good news on the tax front, so far.

Should that inheritance be cash, or cash equivalents, it is yours to spend without further regard for taxes in connection with the inheritance.

Our issues may start to emerge when we are in receipt of assets other than cash. They may be shares, they may be property, they may be in respect of a trading or investment business, or perhaps a collectable (art, antiques etc). If we intend to keep those assets, and never dispose of them, again, we have no tax issues, we pass those issues on to the beneficiaries of our own Will.

If however, at some point, either within a year or two, or even 10 years down the line, sell them or dispose of or gift them to other family members, then we start to come across a couple interesting initial questions that our future tax advisor should ask us. When did you acquire the asset? What is your cost base of that asset for Capital Gains purposes? Unfortunately, the answers to those questions for tax purposes are not, necessary, the date of death, or of probate, nor the value of the asset at death, or when it came into your ownership. Whilst there is no straightforward checklist of how to work out the answers to those two seemingly straightforward questions, most of the information required to build the picture should be sought out at the time the inheritance is received. The reason for that is that those answers will likely be available to the Executors of the Estate whilst they remain interested in that role, and have access to the deceased’s records, but after the passage of time, the answers will become harder to trace. Keeping the records and proof you obtain at this time is also very important.

You should seek out the original purchase date and cost to the deceased, of the asset you have received. This may be your cost base, depending on when it was purchased. This could be particularly onerous where the subject matter is shares, and they have been acquired in small tranches, over many years, via, perhaps, dividend reinvestment.

You should also obtain the probate value, or if one was not calculated, obtain one yourself, as that value may be your cost base, if for example the asset was purchased by the deceased prior to the introduction of CGT back on 20 September 1985.

If it is property, you should ascertain whether the deceased ever occupied the property as their principle private residence (PPR), and if so, for which dates. If you ever occupy your inheritance as your own PPR, that will also affect the future tax outcome and should be recorded.

There may also be concessions available to you if you receive any kind of property, meaning that you are potentially able to sell that property within two years of death, with no tax consequences of the gain within that two years.

With all of the above in hand, your tax advisor should be more than capable of preparing an estimate of your tax position in advance of any proposed disposal of an inherited asset.

Bequests from overseas Estates will be dealt with differently, and partly in accordance with those foreign tax rules, so if that applies to you, seek specialist advice.

Let us now cover the actions that you may put in place, in order that the beneficiaries of your Estate / Will, could find themselves in a slightly better position that they otherwise might have should you take no action.

Firstly, keep good records yourself, to assist your Executors and beneficiaries. That will enable them to have a clear understanding of your Estate.

You should consider the types of beneficiaries you are leaving bequests to. As mentioned in the opening, there are no immediate tax consequences where you leave assets to Australian individuals, but where you are considering bequests to overseas individuals, to charities / churches, to Superannuation Funds or other “advantaged” entities and non-for-profits, a tax event may occur. Take tax advice if this is your thinking. In general, it is not encouraged that you create a capital gains event (and therefore end up paying income tax during your lifetime, on that gain) just to improve your beneficiaries position! But occasionally, there is merit in creating a transaction.

You should also sit down with one of your other professional advisors, your Financial Planner, to ensure your superannuation is structured in the most beneficial way, perhaps reviewing the taxable and non-taxable components towards end-of-life, as well as ensuring the beneficiary of any Life Insurance policy is correctly named and the documents are well-structured.

Finally, and perhaps most importantly, you should discuss, with your tax advisor, your Financial Planner, and your Legal advisor, the potential provision of a Testamentary Trust where you are likely to be leaving assets to minor children. Such trusts have the potential for those children to receive tax thresholds not otherwise available to them, and therefore receive income in a more tax beneficial manner than if you gifted the assets, or left them in your Will directly.

Please note that the above article is provided as though provoking general advice, and should not be relied upon without first consulting your own suitably qualified tax advisor, to ensure the best course of action is taken to meet your own circumstances.

Should you require some more specific advice, please contact our office on 02 9249 7600.

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