Inheritance Tax Australia: A Guide for Expats.
Whilst this article is not formal tax advice, we have done our best to ensure it is accurate at the time of writing.
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Let’s discuss inheritance tax Australia. Surely, it must have brought you pain to know that a family or someone dear has passed away. It would bring you much pain if you’re left with inheritance while you have zero knowledge of the liabilities that come along with it as well as the ways to deal with potential taxes and other considerations.
Here’s the good news: there is no inheritance tax in Australia. While someone passes away, the estate, or the person who inherits the assets, is not required to take any particular inheritance taxes into account when taking ownership of any money or assets.
Although a beneficiary may be obliged to pay taxes from Superannuation death benefit payments or capital gains on the sale of inherited assets if such assets are sold, there is no particular tax imposed on the value of inherited assets. However, a large number of nations, including the UK, do impose inheritance taxes.
The implication of this is that an Australian who inherits money or property from abroad may be liable to some strange inheritance tax.
What is inheritance tax?
Special taxes known as inheritance taxes, also known as death duties in some nations, are imposed on the assets obtained from a decedent’s estate. Taxes must be paid on the value of the inheritance you receive as the beneficiary of a decedent’s estate.
The value that is taken from a deceased person’s estate is taxed similarly through estate taxes. As opposed to the beneficiary, the estate is responsible for paying these taxes. The recipient will therefore receive the net assets once all necessary expenses have been covered by the estate.
Every tax jurisdiction has a different set of regulations governing inheritance taxes. Different tax rates, inclusions for which assets are subject to taxation, and exemptions or limits of various kinds could all exist.
Many British expats should seek inheritance tax advice prior to creating a trust in Australia since some nations, such as the UK, impose inheritance taxes where assets are moved to trusts.
Inheritance Tax Australia: Would an Australian resident be compelled to pay inheritance taxes?
An Australian resident will not be charged any inheritance tax no matter where the inheritance comes from. Before paying or transferring your inheritance to you, though, the decedent’s estate could be charged certain estate taxes. Basically, this indicates that you as a single taxpayer do not need to be anxious about being charged for certain inheritance taxes.
Inheritance Tax Australia: Considerations for Expats Inheriting Australian Assets
As a result of the government‘s 2017 amendment to the Income Tax Assessment Act 1997 and the introduction of the Capital Gains Tax (CGT) event K3, the ramifications for Australian expats inheriting assets from Australian family members have turned more complex.
Assets that are not designated as taxable Australian property are subject to K3 CGT events, which generally fall into either of these categories:
- Collectibles, such as pieces of jewelry, art, and antiques
- Resources for personal use, including cars and furniture
- Other, that’s referring to foreign exchange, crypto, shares, and units in unit trusts
Unless a law regulation specifically exempts them, Australian tax residents are subject to assessments in Australia on all ordinary and statutory income from sources both inside and outside the country.
However, in most cases, a foreign resident, including an Australian citizen who resides abroad, can only be assessed based on their income from Australian sources or based on other criteria besides having an Australian source.
These fundamental concepts could well be modified by Australia’s double tax arrangements with other nations.
When an asset that belongs to one of the three categories above is transferred to a tax-exempt body, like a charitable trust, a not-for-profit society, association or club, or an Australian expat non-resident, as in someone who resides abroad, an event known as a CGT Event K3 is triggered.
A financial asset is said to have been transferred when the beneficiary becomes the legal owner instead of the estate. Any CGT rollover relief that typically takes effect upon a person’s death is not required in order for a K3 CGT Event to occur.
In addition, the capital gain is reported in the deceased person’s final income tax return instead of the estate’s initial income tax return when the CGT Event K3 is triggered. The estate is now responsible for paying the tax.
An event K3 of the CGT could result in the following challenges:
- K3 is applicable to estates with testamentary trusts. Once the executor has finished handling the estate’s administration and has given the trust ownership of its assets, a testamentary becomes effective. K3 will be drawn to the eventual transfer of assets from the testamentary trust to a beneficiary, which could happen years from now.
- K3 will also be applicable in situations where the trust’s trustee and even just one of the beneficiaries — or even possible beneficiaries — are non-tax residents. There is a higher possibility that a future beneficiary will be a non-tax resident and set off event K3 because Australians are becoming more likely than ever to live and work abroad.
- To offset a K3 capital gain, an individual’s deceased capital losses alone — not those of the estate — must be used.
- If the will is not written to assign any applicable CGT to a specific property, other beneficiaries of the estate may be impacted by the CGT associated with a gift they are not getting (thinning of estate assets because of tax liability).
CGT Event K3 Mitigation Techniques
It could be feasible for the beneficiaries to establish a deed of arrangement before the distribution of assets to beneficiaries if there is no adequate provision in the decedent’s will because the law causes the CGT event K3 to be triggered when an asset goes to a non-resident beneficiary.
The deed would make it easier for non-beneficiaries to give up stakes in CGT properties that would otherwise set off CGT event K3 in return for getting extra estate assets that won’t be subject to the same event.
A qualified expert must first consider the effects of CGT and stamp duty before making these arrangements.
The best strategy to lessen the effects of a K3 event is to include a provision in the Will specifying that any K3 liabilities must be paid from that beneficiary portion of the estate.
A well drafted Will can also lessen or completely prevent K3 events by giving assets with bigger underlying capital gains to beneficiaries that won’t result in a K3 event.
Say, a late real estate firm worker acquired a certain amount of shares in the business which had an underlying capital gain at the time of passing. The shares were left to a resident family member. The remainder of the estate was divided equally between one resident beneficiary and one non-resident beneficiary, who each received half in cash. A K3 event did not take place in this estate since cash is not a CGT asset, contrary to shares.
Inheritance Tax Australia: On Inheriting Assets From Abroad
We’ve already established that Australia does not have an inheritance tax per se. However, what about if you’re inheriting assets from overseas? Are there taxes you have to know about?
Ongoing Profits From the Inherited Estate
Any money you get as an inheritance that has been earned as income and has not already been taxed by the estate may be liable to taxation upon your receipt. This is because it’s possible that a deceased person may still be earning money after their passing.
You may be individually assessed on such income if there is a lag between the date the ownership of the estate assets is transferred to you and the actual transfer of such assets to you. Any income amounts that may be affected by this will be disclosed to you by the estate’s executor.
Additionally, you will be subject to regular tax regulations for any continued income you get from inherited assets.
For instance, if you inherited a company, you would be responsible for paying income tax on the company’s continuous profits after it was given to you. If you inherit a rental property for investment purposes, the income you continue to receive from rentals after the property has been passed to you will be liable to income tax.
It’s imperative to keep in mind that taxes in the nation where the inherited asset is located can still be charged against you as we are discussing inheritance from an overseas estate. As a result of the double taxation agreement that the majority of nations have with Australia in this case, you are normally only allowed to pay taxes depending on the nation with the largest income.
Capital Gains Tax
An estate of a deceased person may occasionally be liquidated so that the beneficiaries are merely paid cash. In other cases, beneficiaries could receive assets such as real estate, stocks, a family business, collectibles, or other assets through bequests.
The date of death is normally utilized under Australian Capital Gains Tax legislation as the date you bought the asset, and the asset’s market value at that time serves as your cost basis. This means that you will be responsible for paying capital gains tax on any profit derived from this sale when you eventually decide to sell the asset.
A few exclusions to such capital gains tax could exist, such as when you qualify for the main residence exemption taxes if you inherit a family house and move into or stay in it.
Transferring Funds to Australia
If you received money as an inheritance from a foreign estate, you should also be aware of the implications of transferring that money to Australia.
A CGT asset may include foreign currency. In other words, you are causing a taxable event when you remove money from a bank account located abroad. This is due to the fact that exchange rate valuations change over time, and as a result, there may be a discrepancy between the value of the inheritance you received initially and the value of the funds that eventually land in your Australian bank account.
As a result, from the moment the inheritance money is received until it is moved to your Australian bank account, you may be subject to taxation on any rise in the worth of the foreign funds.
In short, receiving money from an estate located abroad is comparable to receiving funds from an estate located in Australia. While inheritance taxes will not be individually charged against you, other taxes depending on the continued benefits received through the inheritance must be taken into account.
The property or money you inherit becomes yours as soon as it is received. As a result, you are in charge of determining their continued usage and benefit, as you would with any other regular assets or funds that you earn or put toward yourself.
Superannuation Death Benefits
You could receive a lump sum payment or an ongoing income source as part of a superannuation death benefit. Where you were the deceased’s dependent, a lump sum death payment is often tax-free. Based on the features of the benefit paid, you might be required to pay taxes on a portion of the death benefit if you weren’t a dependent or if you received a superannuation death benefit stream of income.
Inheritance Tax Australia: On an Expat Passing Away Abroad
Now, how is an Australian expat’s estate handled if they pass away while overseas?
The laws of your place of residence, various financial systems, and regional customs are just a few of the things you must take into account as an Australian expat.
Let’s delve into certain considerations when an Australian expat passes away in the UK, in the UAE, and in Europe.
Australian Expats in the UK
The UK Inheritance Tax may apply to Australian expats who have established a UK domicile and have been residing in the country. This inheritance tax is 40% of an inheritance that is valued more than 325,000 pounds (393,640 US dollars) and is a tax on all assets, not just British assets.
Only UK assets will be subject to inheritance tax for beneficiaries who are not UK domiciled.
Australian Expats in Dubai, UAE
When a person in Dubai passes away without leaving a Will, it is highly probable that Sharia law will govern the distribution of his or her assets (in fixed shares) located in the emirate. The law is a system of mandatory heirship benefiting the deceased person’s natural parents, legal spouse(s), and natural children.
It would be better to think about writing a Will and having it registered at the DIFC Wills Service Centre, formerly DIFC Wills and Probate Registry, if you have significant assets in Dubai.
The DIFC Courts Wills Service is a collaborative project of the Dubai government and the DIFC Courts that offers non-Muslims investing and residing in the UAE the opportunity to distribute their assets and/or name guardians for their children in line with the directions in their Will.
Sharia law is not used by the DIFC Courts; instead, they follow Common Law principles.
Australian Expats in Europe
Although inheritance taxes are common in Europe, they are often lower than those imposed in Great Britain and Ireland. Portugal, while a European country, doesn’t have inheritance taxes though. It’s actually one of the main reasons why expats seeking for a new place to retire to become drawn to Portugal.
Asset Types’ Impact on Inheritance Tax Australia
Maybe you’re wondering if the kind of asset you’re inheriting will have some sort of effect on your inheritance considerations.
The asset is categorized as a non-taxable Australian real property if an Australian expat inherits a package of shares and he or she is a non-resident for tax reasons. In this scenario, the Australian expat is not considered to have a direct stake in Australian real property. There won’t be any capital gains tax to pay on these assets in the country’s tax system if the Australian expat decides to sell them after inheriting them.
The principal residence an Australian expat who is considered a non-resident is receiving as an inheritance, on the other hand, will be treated as a taxable Australian real property that could be subject to capital gains tax. The beneficiary’s plans for the property will determine how this will play out and whether the main residence exemption would be applicable.
Inheritance Tax Australia: The Bottom Line
While there is no inheritance tax in Australia, knowing other relevant tax considerations as an Australian expat should have notable uses to you at some point, especially when you’re getting a sizable amount of assets as inheritance.
As an expat, it will be much beneficial for you to consult with a professional to aid you with inheritance matters, as well as with Will drafting and execution, particularly in the countries where you have assets. You can also explore ways to set up your affairs in trust or corporate structures to help transfer assets to the next generation.
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