Taxes, taxes, taxes.
They are part of our daily life whether we see it or not. Inheritance and estate taxes are not overly clear until you are thrust into that situation where it is applied. It is a very complex area of the law and this article is merely a quick insight into the industry. However, it’s good practice to become familiar with the terms early on.
Before 1979, Australia had what is known as an inheritance tax or ‘death duty’. This meant any money inherited from a deceased person was subject to a tax from the Government. This was primarily nominated by the person before death in their will. However, since 1979 Australia no longer has such a death tax.
Australia has something called superannuation death benefit. It works similar to life insurance, where the nominated recipient will get paid a certain amount after a death. This amount however, can be subject to a tax from the Government. This is another complex topic and will receive its own article.
Tax on inherited assets:
Another similar type of tax, is the one on inherited assets. This does not occur automatically or immediately. This type of tax only happens when an estate inherited is later sold, in which a capital gains tax may apply to the proceeds of the sale.
There are some exemptions though, and you should speak to an experienced tax agent or lawyer to find out about your situation.
What is estate tax?
When an owner of an estate passes away, the nominated beneficiaries will receive that estate. It works the same way as income tax, because it is considered as a form of income received. While not physical cash, it is the value of the estate that is taken into account.
Often it can take time before you receive the actual estate, but it is clear that you are the beneficiary. So the year that the estate arose is the year you will be taxed, not the year you actually obtain ownership. For example, you become the beneficiary on February 2017, but you only receive the estate the following year. For tax purposes, this will become part of your 2017 tax declaration and taxed as such.
What should you do?
It is highly recommended to have a strategy in place for when you become the beneficiary of an estate, or are writing out your will. With the correct legal help, you can properly distribute your assets and protect it.
You should also discuss tax implications for yourself if you are about to receive an estate. It is even worthwhile to discuss these issues and research about it early on, so there aren’t any surprises later down the track.
Conclusion
So inheritance and estate taxes are clearly very complex. At a very basic level, inheritance tax as such does not technically exist in Australia. The closest thing to this we have is the tax on inherited assets, which only applies if an inherited asset is sold. This is known as a capital gains tax, but doesn’t always apply.
Estate taxes are dealt with like income tax. The year you become the beneficiary is the year you must include it as part of your income and will be taxed as such.
To protect your assets from being taxed too much, you need a quality plan for the distribution of your will, estate and assets.
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