Inheritance tax in Australia: what you need to know

We are at the very beginning of the largest intergenerational wealth transfer in history, as generally wealthy baby boomers pass away and the next generation inherits their assets. It's estimated that by 2050, $3.5 trillion in assets will have changed hands within Australia. If you're likely to be on the receiving end, it can pay to understand the tax implications.

We don't have an inheritance tax in Australia, like those that exist in some other countries. Aside from superannuation, you do not have to pay any tax just because you've inherited something from someone else. But that's not to say there won't possibly be some tax consequences for you depending on what you inherit and what you do with that inheritance.

For most people, inheritance is likely to be made up of some combination of the following four types of assets:

1. Cash

2. Primary residence

3. Superannuation

4. Shares and investment properties.

I'll explore the things you need to know about inheriting each of these assets in the sections that follow.

1. Inheriting cash

Cash is inherited entirely tax free. Cash isn't subject to capital gains tax, so you don't have any of those complications to deal with. You just deposit it into your account and do with it as you please.

Obviously, if you start to earn interest on the cash or choose to invest it, any earnings will then be subject to tax. The earnings get added on top of any other income you earn in a financial year, and you are taxed according to the ordinary marginal tax rates.

2. Inheriting a primary residence

With any type of property you may inherit, it's important you have details and records of how that property was used. If a property was used as an investment or holiday home before becoming someone's primary residence, for example, there will be different tax consequences than if the home was just used as a primary residence the whole time it was owned by the deceased.

If you inherit a deceased person's home and that property was only ever used as the deceased's primary residence, you are granted a two-year window from the date of death to dispose of the property without incurring any capital gains tax liability. This is to recognise that the deceased could have sold the property themselves while they were alive, and they wouldn't have had to pay capital gains tax. So, if you sell it soon after their death (within two years), you won't have to pay any capital gains tax either.

If, however, you decide to keep the property, but you don't move into it and make it your primary residence, it will be subject to capital gains tax just like any other investment property or holiday home. The value of the property at the date of the deceased's death becomes the cost base and any increase in value from there to when you eventually sell (assuming you sell more than two years after death) becomes a gain that the ordinary capital gains tax calculation applies to.

Alternatively, you may inherit someone's home and choose to live in it as your primary residence yourself. If that's the case, the home will continue to be exempt from capital gains tax as long as you treat it as your primary residence.

3. Inheriting superannuation

Superannuation benefits are made up of two components: the taxable component and the tax-free component. What makes up each component depends on how the money got into the superannuation fund in the first place and the types of contributions made.

Superannuation balances are built from two types of contributions. Concessional contributions, such as employer payments and salary sacrifice amounts, add to the taxable component. Non-concessional and downsizer contributions add to the tax-free component.

If you inherit someone's super, it may or may not be tax free - it depends on your relationship with them. You'll receive the full balance tax free if you're:

• their spouse or de facto partner
• a former spouse
• their child under 18
• someone in an interdependency relationship

There's one big group of superannuation beneficiaries who don't make the list - children over the age of 18.

If you're not on the list and you do inherit some superannuation, you'll have to pay tax on the taxable component (the concessional contributions investment earnings). The rate is a maximum of 15% plus Medicare (a total of 17%) if you receive the money directly from the superannuation fund, or 15% (without Medicare) if you receive it from the deceased's estate - meaning the money is first paid from the super fund to the estate, and then distributed to you through the will.

If you're planning your own estate rather than receiving an inheritance, there are ways to minimise or even eliminate this tax. There's a strategy we implement for most of our retired clients where we have them take a lump sum withdrawal from their superannuation fund (tax free) then contribute that same money back into superannuation using the non-concessional contribution cap. If you have enough time, it's possible to eventually withdraw all of your superannuation balance and re-contribute it as non-concessional contributions. This makes the whole balance a tax-free component, and then, regardless of who inherits the super or how they inherit it, the superannuation will be inherited tax free. Please seek some professional advice about this strategy.

4. Inheriting shares or investment property

Inheriting shares and investment properties has similar implications so I'll tackle them together. The act of you inheriting either shares or an investment property doesn't trigger any tax; however, if you decide to sell what you've inherited, you may need to pay capital gains tax.

Firstly, you're going to need to know when the deceased purchased the asset that you are inheriting. If they purchased it before September 1985, then the asset will be called a pre-capitals gains tax asset. This means that if you sell the asset shortly after the date of death, you'll be able to do so without any capital gains tax implications.

If you decide to keep the pre-capitals gains tax asset, it becomes a post-capitals gains tax asset on the date of death, and any increase in value from the date of death to when you decide to sell will be subject to the ordinary capital gains tax calculation.

Now if the deceased purchased the asset after September 1985, capital gains tax is applicable and you'll pay the tax if you choose to sell and you sell at a price higher than the asset was originally purchased for. When you inherit an asset that was purchased after September 1985, you also inherit the cost base of the asset, that is you inherit the original purchase price and any changes that may have occurred along the way to adjust the cost base.

Let me explain with an example. Let's say your parents purchased some shares in CSL when they first listed on the stock market in 1994, the price of which was $0.76 when you adjust for stock splits. Now, suppose you inherit those CSL shares from your parents and you decide to sell those shares.

In January 2025, you could have sold a CSL share for around $285. The gain in the share price from 1994 through to January 2025 becomes assessable to you. I see CSL and CBA inheritances very regularly in my work. The inheritance is making the next generation very wealthy, but it also comes with a very big tax headache that needs to be managed.

If you don't sell the inherited asset, no capital gains tax is payable. Eventually, the asset will then be inherited by someone else and the capital gains tax 'problem' becomes theirs. The liability for capital gains tax never goes away, it just keeps being passed down from one person to the next.

This is an edited extract from Retire Life Ready (Wiley, $34.95), republished with permission.