Families from Asia are often told that Australia has no inheritance tax. That is correct: Australia has had no federal estate duty since 1979 and no gift tax. Hong Kong and Singapore have also abolished estate duty, and Mainland China does not currently levy inheritance tax. But “no inheritance tax” does not mean death and gifts have no tax consequences. The consequences arise through capital gains tax, superannuation and the way assets are transferred.
Capital gains tax on death
Generally, death does not itself trigger capital gains tax. Assets pass to the executor and then to beneficiaries with a cost base inherited from the deceased, or, for assets acquired before 20 September 1985, a cost base equal to market value at the date of death. Tax arises later, when the beneficiary sells.
A deceased person’s main residence has its own rules, including a period after death within which the estate or beneficiary may sell without capital gains tax if conditions are met. Those concessions can be lost or limited where the deceased was a foreign resident at death.
Foreign beneficiaries: CGT event K3
An important exception applies where an asset passes to a beneficiary who is a foreign resident. If the asset is not “taxable Australian property”, for example Australian listed shares or overseas assets of an Australian resident deceased, the deceased is treated as having disposed of it just before death. The tax falls in the deceased’s final return and reduces the estate available to all beneficiaries. Australian real property is taxable Australian property, so it remains within the Australian tax net instead.
This can create real unfairness between beneficiaries in different countries if it is not anticipated in the will. Executors must identify each beneficiary’s residency before distributing. See overseas beneficiaries and capital gains tax.
Superannuation death benefits
Superannuation does not automatically form part of the estate. Death benefits paid to dependants, such as a spouse or minor children, are generally tax-free, but benefits paid to non-dependants such as adult children can be taxed. Binding nominations and the choice between paying directly or through the estate affect both who receives the benefit and how much tax is paid. See superannuation nominations and estate planning.
Gifts from parents overseas
Money given by parents overseas to children in Australia is not generally income and is not subject to gift tax. However:
- Records matter. Banks and the ATO may ask about the source of funds. Gift deeds, bank records and evidence of the parents’ wealth avoid later difficulty.
- Gift or loan? Whether money is a gift or a loan affects family law, estate disputes and asset protection. See family loans or gifts in estates.
- Trusts change the answer. Money received from a foreign trust, rather than directly from a parent, may be taxable under the foreign trust rules. See foreign trusts and companies.
- Gifts of assets. A parent who gifts an asset may be treated as selling it at market value, and gifts of land in Victoria generally attract stamp duty on market value.
Other countries may tax
A beneficiary in Australia may inherit from a country that does tax inheritances or gifts, such as Japan, Korea or the United States. Equally, an Australian estate may have beneficiaries whose own country taxes what they receive. Cross-border estate planning considers the whole family, not only Australia.
How we assist
We prepare wills and estate plans that anticipate tax consequences for beneficiaries in different countries, act as executor of cross-border estates, and coordinate with accountants and tax advisers on the deceased’s final returns and estate returns. This article is general information only; tax outcomes depend on individual circumstances and should be confirmed with a qualified tax adviser. Justin Chua is a Nationally Accredited Mediator and an Affiliate member of STEP, the worldwide professional body for trust and estate practitioners.
Frequently asked questions
Does Australia have an inheritance tax?
No. Australia has no inheritance, estate or gift tax. However, capital gains tax, superannuation tax and stamp duty can apply to assets passing on death or by gift.
Is capital gains tax payable when someone dies?
Generally not at the time of death. Beneficiaries usually inherit the deceased’s cost base and pay tax when they later sell. An important exception applies when certain assets pass to foreign resident beneficiaries.
What is CGT event K3?
It applies when an asset that is not taxable Australian property passes from a deceased Australian resident to a foreign resident beneficiary. The deceased is treated as having sold the asset just before death, and tax is payable in the final return.
Is money from parents overseas taxable in Australia?
A genuine gift from a parent is generally not taxable income. However, money received from a foreign trust may be taxable, and records of the source of funds should be kept.
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 or tax advice. Victorian law unless stated otherwise.
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