Do Estate Beneficiaries Have to Pay Taxes on Inheritance in Australia?

January 24, 2024    Deceased Estate Lawyers Perth
Do Estate Beneficiaries Have to Pay Taxes on Inheritance in Australia?

If you’ve been assigned beneficiary to a will, then you might be entitled to property, assets or estate as designated by the clauses of the will. However, property or estate distribution also comes with the responsibility of its maintenance.

Estate administration is the process through which the deceased’s property is compiled, managed and distributed among beneficiaries along with the liabilities and responsibilities attached to them. These responsibilities include the timely payment of tax, if applicable.

This article is about Estate Distribution Tax and Do Estate Beneficiaries Pay Tax.

What is estate distribution?

Estate distribution is the process of transferring estate assets to beneficiaries or heirs after the passing of the owner or testator. The court is responsible for administering and overseeing this distribution per the testator’s will. This is done through legal probate under the supervision of Probate and Estate Lawyer Perth, which is the process through which the clauses of the will are reviewed.

The final distribution of an estate occurs post-settlement of the estate. This requires the payment of all remaining taxes and credits and solving pending disputes before the estate can be transferred. These are deducted from the estate or the assets before the final distribution and processed by the trustee of the deceased.

Is inheritance or estate distribution taxable?

There are no taxes applicable to inheritance or assets in Australia. However, a beneficiary may still be liable to pay taxes if the inheritance incurred by them generates an income.

The beneficiary is liable to pay taxes under the following conditions:

1. Tax money on rental income of the inherited estate or shares and any applicable dividends.

2. Capital gains tax – This is the tax payable if the beneficiary decides to sell the shares or estate that they inherited from the testator. However, the property can be fully or partially exempt from taxes if it meets specific conditions.

Can the beneficiary receive income from the inherited estate?

The deceased’s estate can continue to generate income until the final distribution to the nominated beneficiaries. This can be through rental income, investment, shares or any form of wealth that the estate can generate. The Rights of Beneficiaries are only entitled to the income the estate generates once it is fully administered to them.

In other words, only after the full property transfer is the beneficiary entitled to receive the income generated by the property, for which they have to pay income tax. This is a part of effective estate planning.

However, in certain cases, a beneficiary can be entitled to the estate’s income before final administration. This situation is called being “presently entitled.” A beneficiary can be presently entitled to an estate’s income in the following conditions:

  1. If they have a vested or indefeasible interest in the estate’s wealth. This means that if there are any challenges at the time of estate distribution, the beneficiary’s interest and claims to the asset will remain intact.
  2. If they have the right to demand immediate payment. In other words, a beneficiary can be presently entitled to the estate’s income even if they have not received the actual income.

Tax returns for presently entitled beneficiaries

The trustee of the testator is responsible for fulfilling distributions of interim income before fully administering the estate. This is done after they have determined the remainder of the property can be used to pay off debts or outstanding liabilities. Once the interim distribution is made, the beneficiary is entitled to the estate’s income.

When the beneficiary becomes presently entitled to the estate’s income before the end of a financial year, they are vested with the following tax duties:

  1. Report their part or share in the net income generated by the estate in their tax return
  2. Pay off any taxes that the estate is due.

Once the transfer is over, an LPR or legal personal representative of the estate must brief you on your taxation duties.

Summing up

The estate administration process can be detailed and complicated due to the involvement of numerous people and potential challenges to the testator’s will. Additionally, beneficiaries of a will need to be thoroughly informed of their entitled assets and any liabilities and taxes attached to the inheritance. This is crucial to help protect the beneficiary from potential underpayment of taxes. Contact the Best Deceased Estate Lawyers in Perth to guide you.

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