Australia has no inheritance tax or estate duty. Families from Asia are often relieved to hear that, and then surprised by the capital gains tax rules. When an Australian estate has foreign-resident beneficiaries, timing and form of distribution can change the tax bill significantly. Executors who get it wrong can be personally liable.
The main issues
- Assets left to foreign residents (CGT event K3). If an Australian-resident deceased leaves certain assets to a foreign-resident beneficiary, a capital gain can be triggered in the deceased’s final tax return as if the asset had been sold just before death. This applies to assets that are not “taxable Australian property”, such as shares in many listed companies. Australian real property is treated differently, because it remains taxable in a foreign owner’s hands.
- Selling Australian property. Purchasers must withhold part of the price unless the vendor provides an ATO clearance certificate. Executors selling estate property need to apply for this in time to avoid delaying settlement or losing funds to withholding.
- The main residence exemption. A deceased’s home may be exempt from CGT if sold within a set period after death, generally two years, or in other circumstances. Foreign-resident status, of the deceased or the beneficiary, can affect whether the exemption is available.
- Income during administration. Rent, interest and dividends earned by the estate are taxed, and distributions to foreign beneficiaries may be subject to withholding.
- The beneficiary’s home country. Singapore, Hong Kong, Malaysia, Mainland China and Taiwan each tax foreign income and gains differently. The best Australian outcome may not be the best overall outcome.
What executors should do
- Establish the tax residency of the deceased and of every beneficiary at the outset.
- Get tax advice before distributing or selling, not after.
- Consider whether to sell assets in the estate or transfer them to beneficiaries, and in what order.
- Hold back enough to pay the final tax returns before making final distributions.
For the will-maker
If some of your beneficiaries live overseas, your will can be drafted to give your executor flexibility. That can mean power to choose which assets go to which beneficiary, or a testamentary trust that can hold assets until a better time to distribute.
Frequently asked questions
Is there inheritance tax in Australia?
No. Australia has no inheritance tax or estate duty. However, capital gains tax rules can apply when assets pass through an estate, and the outcome can change significantly where beneficiaries are foreign residents. Executors should take tax advice early, because the timing and form of distributions can affect how much tax is paid and executors who get it wrong can be personally liable.
What is CGT event K3?
CGT event K3 can apply when an Australian-resident deceased leaves certain assets to a foreign-resident beneficiary. A capital gain may be triggered in the deceased’s final tax return as if the asset had been sold just before death. It applies to assets that are not taxable Australian property, such as shares in many listed companies, but Australian real property is treated differently.
Does an executor need a clearance certificate to sell estate property?
In practice, yes, to avoid withholding. When Australian property is sold, the purchaser must withhold part of the price unless the vendor provides an ATO clearance certificate. Executors selling estate property should apply for the certificate in time, so that settlement is not delayed and estate funds are not lost to withholding.
Can a will reduce tax problems for overseas beneficiaries?
A will can be drafted to give the executor flexibility when some beneficiaries live overseas. That can include power to choose which assets go to which beneficiary, or a testamentary trust that can hold assets until a better time to distribute. The tax rules of each beneficiary’s home country also need to be considered, because the best Australian outcome may not be the best overall.
Chua Tan Associates advises families, executors, trustees and their professional advisers on estate planning, estate administration and estate disputes, in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal advice. Victorian law unless stated otherwise.
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