For example, Ms Lim lives in Singapore. Her father lived in a house in Melbourne’s eastern suburbs until he died, and his will leaves the house to her and her brother in Taiwan. Their first question is ‘Do we have to pay inheritance tax?’ Their second is ‘Should we keep and rent it out, or sell?’ The answers involve federal tax law, Victorian state taxes and foreign investment rules, and they are connected.
Please note that our firm gives legal advice, not tax advice. The tax points below are to help you understand the issues; calculations and lodgements should be handled by an accountant or tax adviser experienced in cross-border matters.
No inheritance tax, but CGT may apply when you sell
Australia currently has no inheritance or estate tax, and a beneficiary does not pay tax simply for inheriting property. Generally, a capital gain or loss arising on death itself is disregarded. But when the inherited property is later sold, capital gains tax (CGT) may apply.
For Australian tax residents, if the home was the deceased’s main residence just before death and was not used to produce income, a sale that settles within two years of death is generally fully exempt. Overseas beneficiaries need to be careful. The ATO states that foreign residents cannot claim the main residence exemption for property sold after 30 June 2020 unless they satisfy the ‘life events test’, and this restriction can also affect inherited dwellings. Foreign residents are also generally not entitled to the 50% CGT discount for periods of foreign residency after 8 May 2012.
In other words, the same house may carry a very different tax outcome depending on whether it is inherited and sold by a child living in Australia or a child living overseas. This is why a tax adviser should be involved when the will is being planned.
Division 128 and CGT event K3: when does it apply?
Division 128 of the Income Tax Assessment Act 1997 contains an often-overlooked rule. When an Australian resident dies and an asset passes to a foreign-resident beneficiary, CGT event K3 may happen: the deceased is treated as having disposed of the asset at market value just before death, and the tax is borne by the estate.
However, K3does not apply to ‘taxable Australian property’, which includes Australian land and buildings. Leaving Australian real estate to a child overseas therefore generally does not trigger K3. Leaving assets such as shares in Australian listed companies to an overseas beneficiary may, reducing what is left for the other beneficiaries. This should be planned for in the will.
The 15% foreign resident capital gains withholding on sale
For contracts entered into on or after 1 January 2025, the foreign resident capital gains withholding rate increased from 12.5% to 15%, and the previous $750,000 price threshold was removed. Whatever the price, unless the seller gives the buyer an ATO clearance certificate, the buyer must withhold 15% of the purchase price and pay it to the ATO.
A foreign-resident seller cannot obtain a clearance certificate but may, in some cases, apply to the ATO to vary the withholding amount. The amount withheld is credited against the actual tax payable when the seller lodges an Australian tax return. Speak with your accountant well before the sale so funds are not tied up longer than necessary.
Victorian duty and the absentee owner surcharge
Under section 42 of Victoria’s Duties Act 2000, a transfer of property by the legal personal representative to a beneficiary, without consideration and in accordance with the will or the intestacy rules, is generally exempt from transfer duty. If the distribution departs from the will (for example, where family members rearrange their shares), duty may apply to the amount beyond a beneficiary’s entitlement. Foreign purchasers generally pay 8% foreign purchaser additional duty; how this interacts with a transfer to an overseas beneficiary under a will should be confirmed against the SRO rules before the transfer.
While the property is held, land tax must also be considered. From the 2024 land tax year, Victoria’s absentee owner surcharge is 4%, on top of ordinary land tax. An individual who is not an Australian citizen or permanent resident and does not ordinarily reside in Australia is generally an absentee. The surcharge may be relevant both while the estate is being administered and after the property is transferred to an overseas beneficiary, so holding costs should be worked out early.
FIRB: inheritance may need notification too
Many people assume inheritance is exempt from FIRB. In fact, since 1 January 2021, the former exemption for foreign persons acquiring Australian land under a will has been removed. Executors acting as personal representatives generally do not need approval, but when an overseas beneficiary acquires an interest in the property, notification to the Foreign Investment Review Board may be required. Where approval could not be sought in advance, notice generally has to be given within a set period (usually 30 days) after the acquisition.
‘Foreign person’ does not depend only on nationality: an individual who is not an Australian citizen and has been in Australia for fewer than 200 days in the past 12 months is generally a foreign person. Approval may come with conditions, such as selling within a set time. The Government also has a temporary ban on foreign persons purchasing established dwellings (1 April 2025 to 30 June 2029); that policy is aimed at purchases, and its effect on any particular inheritance should be confirmed case by case.
Practical checklist
- Confirm each beneficiary’s tax residency at the date of death and when a sale is planned.
- Ask an accountant to compare the tax outcome of selling within two years against holding long term.
- Check whether non-property assets such as shares will pass to overseas beneficiaries (K3 risk).
- Check whether FIRB notification is needed, and diarise the deadline.
- Confirm the duty exemption before transfer, and do not depart from the will’s terms without advice.
- Calculate land tax and the absentee owner surcharge for the holding period.
- Deal with the 15% withholding issue well before the sale.
Frequently asked questions
Does an overseas beneficiary pay inheritance tax on Australian property?
Australia currently has no inheritance or estate tax. CGT may apply on a later sale, and land tax and surcharges may apply while the property is held.
I am a foreign resident. If I sell my parent’s home within two years, is it tax-free?
Not necessarily. Foreign residents generally cannot claim the main residence exemption unless they meet the life events test. Get tax advice before you sell.
Do I need FIRB approval to inherit property?
Possibly. Since 2021, the exemption for foreign persons acquiring Australian land under a will no longer applies, and notification is generally required within a set period after acquisition.
Why does the buyer withhold 15% when I sell?
From 1 January 2025, unless the seller provides a clearance certificate, the buyer must withhold 15% of the price and pay it to the ATO. Foreign-resident sellers may apply for a variation, and the amount is credited when they lodge a tax return.
Is duty payable when the executor transfers the property to me?
A transfer in accordance with the will and without consideration is generally exempt from transfer duty, but arrangements that depart from the will may attract duty, so check before the transfer.
How we can help
Chua Tan Associates has practised in Melbourne since 1990, helping overseas families in Mandarin, Cantonese and English with Victorian probate, estate administration, property transfers and notarial work, and working closely with your accountant where needed. We can also help you plan, at the will-making stage, for children who live overseas. Call us on 03 9602 3988 or contact us online. Consultations are available in person at our Melbourne CBD office or by video.
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This article is general information only and is not legal advice.
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