Inheritance in Australia: What Tax Actually Applies (And What Doesn't)

Australia has no inheritance tax and no estate duty — which surprises many people, and which creates a common misconception that there are no tax implications when you inherit or leave an estate. There are. They're just different from what most people expect, and knowing them in advance can save families significant amounts.

Does Australia Have Inheritance Tax?

No. Australia abolished estate duty (inheritance tax) at the federal level in 1979. All states followed by 1982. There is currently no tax levied on the transfer of assets between a deceased person and their beneficiaries in Australia.

However, this doesn't mean inheriting is completely tax-free. Several tax obligations can arise:

• Capital gains tax (CGT) when inherited assets are later sold
• Tax on superannuation death benefits in certain circumstances
• Income tax on income earned by the estate before it's distributed

Capital Gains Tax on Inherited Assets

CGT does not apply when assets are transferred to a beneficiary on death. It becomes relevant when the beneficiary sells those inherited assets.

The CGT Cost Base Rules

The cost base (the "original purchase price" used for CGT calculation) of an inherited asset depends on when the deceased acquired it:

The 12-Month CGT Discount Rule

If an estate asset is sold within 12 months of the date of death, the 50% CGT discount does not automatically apply. However, the ATO has historically allowed the deceased's own holding period to count toward the 12-month threshold. Confirm with your accountant for your specific situation.

Main Residence Exemption

If you inherit someone's family home, you may qualify for the main residence CGT exemption if:

• The property was the deceased's main residence just before they died, and
• You sell it within 2 years of the date of death (full exemption), or
• You move in and use it as your own main residence

If you rent it out for more than 2 years before selling, only a partial CGT exemption applies — the proportion of time it was a main residence (yours or the deceased's) is exempt.

Superannuation Death Benefits: The Biggest Tax Trap

Super is often the largest single asset in an Australian estate — yet it's also the most tax-exposed for certain beneficiaries.

Superannuation does not form part of a deceased's estate automatically. It's governed by the super fund's trust deed and your binding death benefit nomination (BDBN). This means:

• Super cannot be directed by a Will unless paid to the estate first
• Without a valid BDBN, the trustee decides who gets the super (usually following SIS Act hierarchy)
• Outdated or invalid BDBNs are a major source of family disputes and unintended tax outcomes

Super Death Benefit Tax Rates

This means adult children inheriting super can face a 17% tax bill on the taxable component of that super balance. For a $500,000 super balance that's 90% taxable component, that's a potential $76,500 tax liability that could have been minimised with better planning.

Strategies to Minimise Super Tax on Death

• Pension mode: Converting super to a pension (account-based pension) before death changes the tax treatment significantly — assets in pension mode are tax-free to the fund, and in some cases the tax outcome for adult children improves.
• Re-contribution strategy: Withdrawing super (if over preservation age) and re-contributing as non-concessional contributions converts taxable component to tax-free component, reducing the death benefit tax burden for adult children.
• Direct super to estate, not beneficiaries: Paying super to the estate and then distributing via Will can sometimes reduce total tax depending on beneficiary tax positions — but also exposes super to estate creditors and delays.

Wills, Probate, and Estate Administration Costs

Estate administration costs reduce the value beneficiaries ultimately receive:

• Probate fees: Vary by state. In NSW, for example, probate for a $1M estate costs approximately $1,500–$2,000 in court filing fees.
• Executor / solicitor fees: Professional estate administration typically costs 1–2% of the estate value.
• Accounting fees: A final tax return for the deceased and potentially estate tax returns add $1,000–$3,000+ depending on complexity.

Frequently Asked Questions

Do I need to declare an inheritance on my tax return?

The inheritance itself is not income and does not go on your tax return. However, any income earned from inherited assets (rent, dividends, interest) is taxable income. And capital gains when you sell inherited assets are reportable in the year of sale.

What happens if there is no Will?

The estate is distributed according to each state's intestacy laws — typically to spouse first, then children, then other relatives in a prescribed order. Intestacy can cause significant delays, extra costs, and unintended outcomes (particularly for de facto partners and blended families). Every adult should have a current, valid Will.

Can an inheritance affect Centrelink payments?

Yes. An inheritance is an assessable asset and may be deemed income under the deeming rules for most Centrelink means-tested payments (Age Pension, DSP, JobSeeker). You must notify Centrelink within 14 days of receiving an inheritance. Receiving a large inheritance may temporarily reduce or eliminate Centrelink payments.

Are gifts before death treated like inheritances?

Not for tax purposes. Gifts made during life may still have CGT implications for the giver at the time of transfer (CGT applies on disposal, including gifts). Centrelink's "gifting rules" also apply — gifts above $10,000 per year (or $30,000 over 5 years) are still counted as assets under the social security means test for 5 years.