Australia: no inheritance tax, but super and CGT at death

No estate tax, federal or State

The Commonwealth Estate Duty was limited to deaths before 1 July 1979 by the Estate Duty Amendment Act 1978. Western Australia's Death Duty Assessment Act 1973 applied only to deaths before 1 January 1980. The current Duties Acts of New South Wales and Queensland contain no death, probate or succession duty, and Victoria's Probate Duty Act 1962 is listed as repealed. The ATO states plainly that there are no inheritance or estate taxes in Australia.

What remains are income tax charges that happen to be triggered by a death. Two matter most to a family: tax on superannuation death benefits, and capital gains tax when an inherited asset is sold.

Superannuation paid on death

In short: Australia has no inheritance tax, but a super death benefit can be taxed. Paid to a death benefits dependant, the whole lump sum is tax free. Paid to a non-dependant, such as an independent adult child, the tax-free component stays tax free and the taxable component is taxed at up to 15 per cent on the taxed element and 30 per cent on the untaxed element; from 1 July 2026 the fund withholds 17 and 32 per cent, which include the 2 per cent Medicare levy.

Super does not form part of the estate unless the fund pays it there. Who receives it decides the tax. A death benefits dependant pays nothing: a spouse or former spouse, a child under 18, a person in an interdependency relationship (close personal relationship, living together, financial and domestic support), or anyone financially dependent on the deceased just before death.

An adult child who was independent is not a dependant. The tax-free component is still tax free, but the taxable component is assessable income, with an offset capping the rate at 15 per cent on the element taxed in the fund and 30 per cent on the element untaxed in the fund. The fund withholds 17 and 32 per cent, which include the 2 per cent Medicare levy; for a foreign resident the levy is left out.

Paid to the trustee of the estate, the benefit is not withheld. It is then treated according to who benefits from it: as paid to a dependant to the extent dependants benefit, and otherwise as paid to a non-dependant (s. 302-10).

A dependant can take the benefit as an income stream, a lump sum, or both; a non-dependant can only be paid a lump sum. A foreign resident receives the same tax treatment as a resident but is generally exempt from the Medicare levy, and where the recipient is resident in a country that has a tax treaty with Australia, there may be no Australian tax (ATO).

ATO, Paying superannuation death benefitsATO, Schedule 12, tax table for superannuation lump sums

Capital gains tax on an inherited asset

Death itself is not taxed. The gain is taxed later, in the hands of the beneficiary who sells. The starting point is the cost base: the deceased's own cost base for an asset acquired from 20 September 1985, or market value at death for an asset acquired before that date and for a dwelling that was the deceased's main residence, not producing income, just before death. Where the deceased was a foreign resident for more than 6 years at death, the main residence rules change; the calculator then shows no figure.

The ATO's own example: Lucy's home, bought for 250 000 dollars in 2000, was her main residence until she died in 2012, when it was worth 425 000 dollars. Amy let it for eight years and sold it for 975 000 dollars. The gain is 550 000 dollars; the 3 013 days of letting out of 7 396 days of ownership make 224 060 dollars taxable, and the 50 per cent discount brings it to 112 030 dollars. The calculator reproduces these figures.

• Sale settled within 2 years of death, or the home remained the main residence of the beneficiary, a spouse or a person with a right to occupy until sold: gain disregarded, provided the deceased was not a foreign resident for more than 6 years.
• Otherwise the exemption is proportional to the days on which the home was a main residence, counted from the deceased's purchase for a post-CGT home and from death for a pre-CGT one.
• Shares and investment property have no exemption: the gain runs from the deceased's cost base, or from market value at death if acquired before 20 September 1985.

What the calculator leaves out

The final income tax on the net capital gain, which depends on the beneficiary's other income; any case where the beneficiary is a foreign resident at sale, or the deceased was a foreign resident for more than 6 years (the main residence exemption and the discount then change); joint tenancy; partial use of the home after death; the CGT event at death when an asset passes to a foreign resident beneficiary; and death benefit income streams.