The “death tax” was a heated topic in the most recent Australian election. As a result, there was a lot of controversy and confusion.

You may be wondering if your estate will have to pay more taxes in the event of your death. “No” is the short answer.

In some countries, such as the United Kingdom and Japan, death taxes—also known as inheritance taxes—are common. Australia removed inheritance taxes in the early 1980s. This explains why some wills still include “death duties.”

This does not indicate that an estate or its beneficiaries are exempt from taxation. When assets pass to beneficiaries or dependents as an inheritance from a deceased estate, a number of additional taxes and levies that resemble inheritance taxes are applicable.

Benefits of Superannuation Death

Superannuation death benefits tax is essentially a death tax because it is a tax liability arising from the policyholder’s death.

Let’s start with some background. Technically, you do not own what you may refer to as “your” superannuation. When you meet a release requirement, the trustee of your superannuation fund will release it from trust on your behalf. The criterion for release is death.

Therefore, the trustee of a superannuation fund must release the superannuation when a member passes away, either in line with a legally enforceable death benefit nomination or at the trustee’s discretion. 

Anyone who fits the description of “superannuation dependants” or your estate is eligible to collect superannuation directly.

The trustee of the superannuation fund will determine whether a person qualifies as a “death benefits dependant” if they choose to pay the fund directly to someone who fulfills the description of a “superannuation dependent.” No tax is due if they are. Taxes will be due if they are not.

The executor or administrator is responsible for paying taxes and determining whether the final beneficiary is tax dependent if the trustee of the superannuation fund chooses to distribute the money to the estate. The administrator or executor may be at risk from this.

Although the terms “death benefits dependent” and “superannuation dependent” seem similar, they differ in a few important respects.

It can be difficult to determine how much tax is due if it is due. The setup of your fund will determine this. In essence, it is divided into two parts: the taxable portion and the tax-free portion.

No matter to whom it is paid, the tax-free amount that emerges from superannuation is never subject to taxes. The taxed and untaxed components of the taxable portion are separated. The taxed part is taxed at 15% plus the Medicare levy since it was taxed at 15% when it was paid into super.

The untaxed portion is taxed at 30% plus the Medicare levy since it was not taxed at the time of entry. The percentage of your superannuation death benefits that are tax-free, taxed, and untaxed is the main determinant.

Thinking carefully about who you want to be a beneficiary of your superannuation fund is crucial. You can reduce the tax implications of superannuation going to your designated beneficiaries with a little bit of proper estate planning.

To further understand how it operates, let’s look at some samples.

Example 1:

John and Jane have three grown children together. John has a $500,000 member sum in his superannuation account, along with a $1 million life insurance payout.

Jane directly received John’s entire superannuation upon his death. Her status as a superannuation dependent made this possible. As a death benefits dependent, Jane was exempt from paying taxes.

Example 2:

John and Jane have three grown children and are divorced. John has a $500,000 member sum in his superannuation account, along with a $1 million life insurance payout.

In a death benefit nomination, John named his children as beneficiaries. This nomination for superannuation dependents is legitimate. They are not, however, dependents on death benefits. Thus, they will be required to pay taxes.

The remaining $300,000 would be taxable at up to 15% plus the Medicare levy, and the insurance benefit would be taxable at 30% plus the Medicare levy, assuming that $200,000 of his member balance is tax-free.

The entire tax burden in this case might be $370,000!

CGT (Capital Gains Tax) on Inheritable Property

When someone inherits a CGT asset, such real estate or stock, they also inherit the associated cost base. The estate is responsible for paying the CGT if a CGT asset is sold inside the estate. Therefore, it makes sense to consider CGT when inheriting or selling CGT assets as part of an estate.

CGT went into effect on September 20, 1985. The following questions will determine whether you are exposed to CGT now or in the future:

• if the deceased bought the property before or after September 20, 1985?
• Did the deceased use the property as their primary home right before they passed away?
• Two years after the deceased’s death, are you selling the property?
• Did the dead generate revenue from the property?
• Does the property serve as your primary home?
• Are you making money off of the property?

You should always speak with a knowledgeable tax professional about the possible CGT consequences based on your unique circumstances because the rules pertaining to this might be complicated and there may be specific exclusions available in some cases.

Taxation of Estate-Related Income

As a beneficiary of an estate, any income to which you are entitled is calculated as regular income.

Your required income tax payment may rise as a result of this. Importantly, the tax on entitlement is not assessed in the tax year in which you received the income, but rather in the year in which the entitlement originated.

It’s crucial to have professional counsel on how this can impact your tax situation if you are worried about it and know you will be a beneficiary of an estate.

In order to determine the best approach to divide assets, executors must also consult with legal and tax professionals.

The subject of estates and inheritance taxes is very complicated. We can assist you if you’re getting bogged down in the details. Our knowledgeable staff of estate attorneys and advisors collaborates to secure the best result for you.