Tax obligations are a subject nobody wants to discuss until it becomes too late. In Australia, it is crucial to understand the various tax obligations, especially in terms of inheritance.
Fortunately, there are no inheritance taxes in Australia. Even so, certain financial affairs need to be taken care of after one's passing. Most inheritance endeavours are easy to handle, but some might require professional help or financial advice.
Just like managing your taxes matters, so does setting up your will. Especially when it comes to inheritance or loved ones passing away, updating one’s will is crucial in managing all related finances and inheritance aspects.
Below, let’s discuss how inheritance and other taxes in Australia work and how one's will affects all inheritance affairs.
Why is Your Will So Important?
A Will is a legal document featuring the names of individuals that will receive all funds and belongings of a departed person. This document is crucial and includes all information about how properties and other assets will be handled post mortem.
As we already mentioned, one must constantly update their will, especially if any financial or property changes ensue. All changes and updates made within the will are going to take full effect following its holder’s departure.
What Tax Obligations Do Australian Citizens have?
Although there aren't taxes on inheritance in Australia, there are other tax obligations that estate executors need to take care of.
Superannuation tax, also called a super death benefit, is the tax the nominated beneficiary pays. When a person who has superannuation dies, the super is paid to the nominated individual. The taxes in this case are applied due to various factors. The taxation law will set the tax based on the benefits received, or after the Super law decides who will receive the super death benefit.
What Factors Determine the Tax on Super Death Benefit?
Various important factors determine the death benefit tax.
● Dependents can choose between two options to be paid - as income streamer or via a lump sum;
● In case you aren't dependent, the only option to be paid is via a lump sum.
● The age of the recipient is another essential factor in determining this tax;
● If you decide to be paid as an income stream, there may be additional tax obligations to complete. As for a lump sum, it is entirely tax-free.
Taxable vs. Tax-free Superannuation
The contributions you make are the main factor in determining which part of your superannuation is tax-free and which one is not.
There are two types of contributions:
Concessional or Before-tax contributions
Before-tax or concessional contributions are added to one’s super account before their income tax is dedicated. One can reduce their taxable income by putting more before-tax salary into their super.
Non-concessional or After-tax contributions
After-tax or non-concessional contributions is the amount of money paid into one’s investment or retirement account following the deduction of income taxes on those earnings. Individuals with higher income may use a traditional account to contribute their after-tax income, alongside the maximum allowed pre-tax sum.
Are There Inheritance Taxes to Pay Other Than Superannuation?
The taxes one needs to pay depends on the type of inheritance they receive.
In other words, the type of heritage received can determine the tax type to pay. Here are some of the related inheritance taxes one might be subjected to paying.
Capital Gains Tax or CGT
The Capital Gains Tax is a must if you decide to sell the asset you received from the deceased. Furthermore, Capital Gains Tax may also follow if you decide to sell an asset before taking out the funds to the beneficiaries.
According to the Australian Taxation Office or ATO, each income received from a deceased estate will be considered as regular income. This means you'll have to pay more tax in the same year you acquire your income.
For instance, if you have been entitled to the deceased estate income starting on 30 June 2020 but only received the income by September 2020, you will report on that amount in your 2019-20 tax returns, not in the 2021 income year.
This is essential information to consider when it comes to estate planning. Although there isn't any inheritance tax, estate planning enables you to better manage your financial affairs.
Schedule a session with one of our professionals to learn everything on taxes that may arise from the passing of a loved one.
At Captaxation, we help you understand your tax obligations and put a plan in place!