Inheritance Tax Explained

What is inheritance tax?

Inheritance tax refers to the rage of taxes that may be payable by a person who is a beneficiary in a Will.

The good news is that unlike many other countries, in Australia, there is no inheritance tax or death duties imposed. All states in Australia abolished death duties in 1979, following the lead of the Queensland Government.

However, property acquired from the estate may become subject to capital gains tax (‘CGT’)

Capital gains tax

CGT is a tax levied on the profit from the sale of property or an investment. If you inherit a dwelling or other property after CGT started on 20 September 1985, and later sell it or otherwise dispose of it, CGT will apply unless you qualify as one of the exemptions.

The same applies if the deceased person’s legal representative (executor or administrator) sells the deceased’s property as part of winding up their Estate.

The exemptions are all dependent on when the deceased acquired the property, when they died and whether the property had previously been used to produce any sort of income (such as rent).

CGT exemption situations

The deceased died before 20 September 1985:

  • If you inherited a dwelling before 20 September 1985, any capital gain you make when you dispose of it is exempt. However, any major capital improvements you make to the dwelling on or after 20 September 1985 may be taxable.

Deceased acquired dwelling before 20 September 1985 and died on or after 20 September 1985:

  • CGT does not apply to the dwelling if either of the following conditions are met:
    1. (Disposal within two years): You dispose of the ownership interest within two years of the person’s death – e.g. dwelling is sold under a contract and settlement occurs within two years. This exemption applies whether or not the dwelling is used as main residence or to produce income during the two-year period.
    2. (Main residence while you owned it): From the deceased’s death, until you dispose of your ownership interest, the dwelling is not used to produce income and is the main residence of one or more of:
      • A person who was the spouse of the deceased immediately before the deceased’s death
      • An individual who had a right to occupy the dwelling per the deceased’s will
      • You as a beneficiary, if you dispose of the dwelling as a beneficiary.
        • Note – a dwelling is considered to be your main residence from the time you acquire your ownership interest in it if you move in as soon as practicable after that time

Deceased acquired the dwelling on or after 20 September 1985:

  • CGT can be disregarded if either of the following occurs:
    1. The dwelling passed on or before 20 August 1996, and:
      • the ‘main residence while you owned it’ condition is met; and
      • the deceased used the dwelling as their main residence from the date they acquired it until the death and did not use it to produce income
    2. The dwelling passed to you after 20 August 1996, and:
      • The ‘disposal within two years’ condition was met, or the ‘main residence whilst you owned it’ condition is met; and
      • Just before the deceased died it was their main residence and was not being used to produce income

Partial Exemptions

There are also situations where you may not be fully exempt, but could be partially exempt from paying CGT. For example, the deceased never used the property as their main residence, but you as the beneficiary did. The tax payable then is determined according to the number of days the deceased owned the house, and the number of days you owned the house in conjunction with the capital gain made.

Evidentially, the world of CGT can at times be very complex. If you are a beneficiary under a Will you need to make sure that you are aware of all the taxation implications in your inheritance, and by receiving expert legal advice at an early stage, you may be able to minimise any CGT payable. So help us, help you and speak to one of our Wills and Estate Lawyers today and we can help you to Dispute Wills and deal with Inheritance Disputes.